Oil Retailers’ Earnings Set To Bounce Back In Fourth Quarter

Profits of state-owned oil marketing companies may bounce back in the fourth quarter of financial year 2018-19 on the back on strong margins and rising crude oil prices, according to BloombergQuint's calculations.

India's top three oil retailers—Indian Oil Corporation Ltd., Hindustan Petroleum Corporation Ltd. and Bharat Petroleum Corporation Ltd.—had reported a 74 percent drop in combined net profit in the December-ended quarter, their biggest fall in the last three years. This was due to a sharp decline in crude prices and refining margins.

The ongoing quarter, however, is expected to boost their earnings. “Fairly robust marketing margins along with plausible inventory and forex gains should ensure a healthy Q4 earnings,” Nitin Tiwari, oil and gas analyst with Antique Stock Broking, said. “Though a tad weaker refining environment could be drag on core refining margins.”

Though, Brent crude—the Asian benchmark for oil—averaged 7 percent lower compared to the previous quarter, the prices were rising throughout the quarter. Brent crude gained nearly 27 percent from its January low to March, clocking its best quarterly gains in the last 10 years. The surge was led by growth in demand and supply cuts.

Lower crude prices usually cause inventory losses for oil retailers because of buying at a higher price and selling cheaper. But this time, despite lower average prices than the previous quarter, they may report inventory gains or a very small inventory loss as crude surged throughout the quarter.

Despite rising crude oil prices, gross refining margins—the amount a company earns for converting a barrel of crude oil into fuel—remained weak for most part of the quarter. The Singapore GRM—the Asian benchmark—averaged around $3.2 per barrel, its lowest in at least the last six years. GRMs, however, recovered towards the end of the quarter due to refinery maintenance shutdowns announced in Asia, Europe and the U.S.

A lower GRM means refiners earns less for processing every barrel of crude.

Unlike the previous quarters, petrol and diesel prices moved in tandem with the global crude oil prices for the first three months of 2019. This has helped the oil marketing companies earn steady gross marketing margin on sale of every litre of petrol and diesel, according to data compiled by BloombergQuint.

The gross marketing margin is the mark-up earned by the OMCs on sale of every litre of petrol and diesel. On an average, gross marketing margins earned on sale of every litre of petrol and diesel stood at Rs 5.83 and Rs 5.85, respectively in the March-ended quarter.

That's expected to benefit HPCL and BPCL the most as retail sales contribute nearly 60 percent and 40 percent, respectively, to their operational profit, according to data compiled by BloombergQuint.