Three reasons why oil cos will incur loss in Q3 too

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Three reasons why oil cos will incur loss in Q3 too

The worst just doesn’t seem to get over for state-run oil marketing companies (OMCs) even in the December quarter which has just gone by.

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Moneycontrol Bureau

The worst just doesn't seem to get over for state-run oil marketing companies (OMCs) even in the December quarter. Expensive crude, a weak rupee and ballooning under-recoveries which prevailed during preceding two quarters continued to hurt profitability of Hindustan Petroleum (HPCL), Bharat Petroleum (BPCL) and Indian Oil Corporation (IOC). Hence, if these companies post Q3 losses, it should not come as a surprise to investors, say analysts.

During the quarter, while crude shot up 26% (YoY) to USD 106.87 a barrel, rupee also rose around 12% averaging at Rs 53.58, making imports expensive. OMCs which purchase 80% of their fuel requirement from international markets in dollar terms

Later, after refining fuel they sell finished products like diesel, kerosene and liquefied petroleum gas (LPG) at government regulated prices to keep inflation in check. However, the government partially compensates these companies for selling below cost each year. Howver, there is little certainty as to when and how much compensation the government will give to these companies for losses which they have already incurred.

According to a data released by the petroleum ministry, oil companies are losing Rs 388 a day for selling fuel products below costs.

This means the sector will report under-recoveries of around Rs 3,4920 crore for the quarter.
Taking all these factors into account brokerages expect the sector to be in red in Q3.

Did you read: OMC`s under-recoveries at Rs 1.4 trillion: CRISIL

Here's a view of several other brokerages on the sector's Q3 earnings and the stock outlook going ahead.

RK Global
Oil marketing companies (OMCs) are facing stiff challenges due high crude oil prices, depreciating rupee, capped retail prices which have led to record under recovery losses. Investors remain wary of holding these stocks given the unclear government policies on subsidy sharing. We don't expect any price action on petroleum products in the next three months given the assembly election to be held in five states. We recommend a 'hold' rating for HPCL and IOC.

ICICI Securities

"Though HPCL and BPCL will report 30% and 24% growth in revenues (YoY) for the December quarter due to increase in retail sales volume, both the companies will report an EBITDA loss of Rs 107 crore and Rs 316 crore. This is due to inadequate compensation from the government for selling below costs," say Mayur Matani and Nishit Zota from ICICI Securities in their report.

Morgan Stanley

Due to the factors discussed above the firm has downgraded HPCL, BPCL from equal weight to under-weight.

Bank of America Merill Lynch

Expects oil companies to be in the red in the December quarter and expects HPCL and BPCL to post collective losses in the range of Rs 16.3-18.8 billion (Rs 1630 crore -1880 crore) for the quarter under preview. The firm expects the refining margins at BPCL and HPCL to weaken around 49% to USD 2.4/bbl and USD 2.66/bbl YoY.  Refining margin is the difference between the total value of petroleum products produced by an oil refinery and the price of the input.

Macquarie Research

Expresses concern on the higher debt on the balance sheets of all the OMCs resulting in higher interest expenses and pressure on profitability. To top it all, benchmark Singapore gross refining margins have been weak in this quarter, which is likely to adversely affect the OMCs' financial performance. 

(Q3 estimates of OMCs by atleast three brokerages.)