Indian Oil, BPCL, HPCL Results: Too Many Things Lined Up Against Oil Refiners This Fiscal

Lower sales of diesel and jet fuel, surplus global capacity, work-from-home amid the pandemic and less-than-expected refinery closures across the world could dent oil firms’ earnings in the ongoing fiscal.The Bloomberg consensus estimates showed that the aggregate earnings before interest, tax, depreciation and amortisation and net profit of the three listed oil marketing companies — Indian Oil Corp., Hindustan Petroleum Corp., and Bharat Petroleum Corp. — are likely to fall 21.8% and 42.9%, respectively, over the year earlier in 2021-22.India’s cumulative consumption of petroleum products for the first seven months of 2021 was 7.3% lower than the corresponding pre-pandemic level in 2019 at 119.4 million metric tonnes, according to data released by the Petroleum Planning and Analysis Cell. Demand for petrol, diesel, and aviation turbine fuel contracted 1.9%, 10.9%, and 44.8%, respectively, during the period.Diesel and petrol account for more than half of oil consumption in India. “Diesel continues to be a cause of worry. Lack of public mobility is taking a toll on its consumption,” Sandeep Kumar Gupta, director (finance) at Indian Oil, said in a post-Q1 earnings conference call.According to a Bloomberg Intelligence report, the global oil demand may struggle in the near future as the spread of the virus’ delta variant has “thrown a chain in the spokes of return-to-office plans, stifling road traffic and snarling business travel.” It expects oil prices to slip to $50 a barrel in the second half of 2021. The price of Brent crude has fallen 8.4% in August so far to $69.9 a barrel.ICRA Ltd. said the subdued demand for petroleum products would drag the refinery throughput (the amount of crude that goes into a refinery) of Indian refiners below the 2018 levels. Demand for jet fuel, it said in a report, would be the slowest to recover as travel restrictions are likely to stay until the pandemic is firmly under control. Gasoil cracks—the difference between the price of crude oil and petroleum products extracted from it—are expected to remain depressed due to oversupply. Petrol cracks have recovered but high fuel prices and remote working is creating a drag on the recovery, ICRA said.Any further waves of the Covid-19 and lockdown measures, according to ICRA, remain a key concern for refining margins.ICICI Securities, citing estimates of International Energy Agency, said the demand for global refined products is expected to be back to pre-Covid levels only in 2023. A total of 6 million barrels a day of refinery closures are needed to prevent oversupply and drive recovery in gross refining margin, the brokerage said in a report. Only 3.6 million barrels a day of refinery closures have been announced so far.Rising U.S. petroleum exports and an increase in petrochemicals capacity by China to reduce imports could also weigh on the gross refining margin.U.S. petroleum product exports, according to Bloomberg data, have jumped from $8.12 billion in June 2016 to $17.76 billion in June 2021. At the same time, global commodity market researcher ICIS expects China’s polypropylene imports to fall 53% year-on-year in 2021.Long-term future is also bleak. ICICI Securities estimates that share of petrol and diesel vehicles is expected to decline from 88% in 2020 to 24% in 2030, and further to 12% in 2035. The proportion of all hybrid vehicles, including EVs, is likely to rise to 89% in 2035 from about 12% in 2020, it said. As a result, according to the brokerage, demand for refinery products is likely to decline in 2024-2040.State-run refiners, however, still plan to expand capacity. While Indian Oil is investing Rs 32,400 crore to expand its Panipat refinery, HPCL is spending Rs 74,300 crore to expand its processing capacity by FY24. Indian Oil, BPCL and HPCL have yet to respond to BloombergQuint’s emailed queries.ICICI Securities sees the need for bigger refinery shutdowns to maintain the demand-supply balance and help gross refining margins recover.

Indian Oil, BPCL, HPCL Results: Too Many Things Lined Up Against Oil Refiners This Fiscal

Bloomberg consensus estimates shows that Ebitda and net profit of Indian Oil, HPCL and BPCL are likely to fall in 2021-22.

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