Marginally weaker international crude prices and a stable rupee may not bring much cheer for oil and gas companies in the third quarter due to rise in under-recoveries and fall in gross refining margins.
Under-recoveries of oil marketing companies (OMC) would expand due to seasonally higher consumption of diesel and higher LPG prices.
“After sharp volatility in Q2, both oil prices and rupee were rather flat in Q3. But refining margins plunged (down 20% sequentially) and have only recently recovered,” Nomura said in an earnings preview report.
In second quarter Brent crude prices averaged $109 per barrel and rupee remained flat at 62 against dollar. Upstream companies like Cairn India and ONGC are likely to report robust earnings on higher volumes, but Reliance Industries Ltd (RIL) earnings would be impacted due to lower refining and petrochemical margins.
RIL’s refining margins are seen flat to marginally low at $7.6-$7.7/bbl as against $7.7 in Q2.
However, they would be better than benchmark Singapore GRM of $4.3/bbl, which has declined nearly 22% sequentially. Petrochemical, which is RIL’s cash cow business, would see 10% sequential decline in EBIT, due to lower polyester margins. Operating profit of its exploration & production business may also decline due to fall in KG-D6 production.
RIL’s net profit is seen at Rs 5,315 crore, down 3% on-year and on-quarter and revenues are seen at Rs 1,02,310 crore up 9% on-year but down 1.4% sequentially.
“Cairn India’s operating profitability would grow, but PAT would decline on reversal of mark-to-market foreign exchange gains,” Morgan Stanley said in a report. The company’s oil production from Rajasthan block is seen rising 6% on-quarter to 186,000 barrels per day. This will also help joint venture partner ONGC’s volumes. Cairn India’s net profit is seen declining 9% sequentially to Rs 3,079 crore and revenue is seen rising 4.5% to Rs 4,859 crore.
State-owned upstream companies are likely to continue bearing subsidy at $56/bbl, ICICI Securities and Morgan Stanley said. “With stable currency and marginal decline in standalone production, ONGC’s subsidy share is expected to fall 1% QoQ, to Rs 13,700 crore. Net realisation is expected to marginally improve to $45.25/bbl (up 1% QoQ),” the Morgan Stanley report said.
Brokerages were a divided house on whether OMCs would report profit for Q3 due to lack of clarity on subsidy sharing.
Most brokerages expect subsidy burden to rise 9-11% to Rs 38,400-39,000 crore. While Nomura expects government to defer subsidy payment to Q4, leading to deep losses in Q3, ICICI Securities said OMCs would bear nil subsidies.
“Considering the rising losses in diesel, we expect OMCs to bear nil subsidies, and government to provide Rs 23,700 crore cash compensation (60% of total under-recoveries). OMCs should therefore be able to report profits for Q3,” the report said.
Mid-stream company GAIL is expected to see surge in earnings mainly due to exemption from subsidy burden, higher LPG prices and petrochemical realisations. GAIL reached its full-year share of Rs 400 crore in first half. However, lower gas transmission volumes may partially offset higher earnings. Kotak Institutional Securities expects GAIL to report gas transmission volume of 95.6 mcmd as against 95.2 mcmd in previous quarter and 105 mcmd in last year quarter.