The ongoing global energy crisis has not only helped the domestic energy sector report one of the best quarterly earnings in the recent years, but has also likely put the sector’s growth in the fast lane.
In the quarter ended March, domestic crude oil producers and refiners saw their revenues from operations jump 30.5 percent on-year, and 7.40 percent on-quarter, aided by higher oil prices and refining margins.
However, weak bottomline performance of state-owned refiners weighed on the bottomline performance of the sector as they failed to raise prices of retail fuel in tandem with global crude oil prices and thereby, incurred heavy marketing losses.
The consolidated net profit of the oil sector fell 0.9 percent on a year-on-year basis in the March quarter but rose 11.6 percent on a sequential basis thanks to strong growth in Oil India and Reliance Industries. Similarly, operating margins shrank 13 basis points on-year to 9.95 percent in the reported quarter.
Brokerage firm Kotak Institutional Equities believes that the energy sector alone will contribute nearly 29 percent of all the incremental profits made by Nifty 50 companies in 2022-23 over the previous financial year.
The optimism for the sector is also reflective in the BSE Oil and Gas Sector’s 7.5 percent gains in 2022 so far as against more than 5 percent fall in the Nifty 50.
Oil Producers
Oil producers are at the forefront in terms of earnings outlook driven by near eight-year high global crude oil prices. India’s two oil producers – Oil & Natural Gas Corporation and Oil India – reported a 21 percent and 207 percent jump in net profit in the March quarter, respectively.
Crude oil prices have remarkably sustained above the $100 per barrel mark since the breakout of war between Russia and Ukraine in February. While the commodity’s price cooled towards the $100 per barrel mark in April and large parts of May, it has again risen above the $120 per barrel mark following fresh sanctions from European Union on Russian oil exports.
Combined with signs of improving demand from one of the world’s biggest oil consumers, China, global oil prices are expected to sustain at current levels for 2022-23.
“I think we're in a market that's tight right now, that has a lot of uncertainty and I think that is not likely to resolve itself in the near term, the uncertainty,” global oil giant Chevron’s Chief Executive Officer Mike Wirth told analysts after the company’s March quarter.
Chris Wood, global strategist at Jefferies, told CNBC-TV18 in a recent interview that he expects global crude oil prices to resume their rally towards $150 per barrel as outlook on supply remains subdued while demand is strong.
Reliance Industries
Keeping RIL’s telecom and retail business aside, the refining business of the company is expected to be the biggest growth driver for the company in 2022-23 after a strong showing in the March quarter.
RIL’s oil-to-chemical business reported a 44 percent on-year rise in revenues and a 25 percent jump in operating profit as refining margins for the company soared on the back of tight global diesel and gasoil inventories and strong demand.
The Singapore Gross Refining Margin benchmark, tracked by Indian refiners, has been on a tear in 2022 as sanctions imposed on Russian energy sector has sharply constrained global supply chains at a time when energy demand has come back roaring due to reopening of economies world over.
“We estimate that the global refining industry could fall short by one refinery annually in the years ahead as the threat of ‘peak oil demand’ has led to an extended period of underinvestment. With new project slippages and demand growth, margins should remain elevated,” said Morgan Stanley India in a recent note.
Morgan Stanley expects RIL’s consolidated revenues to growth 20 percent and operating profit to surge 50 percent in 2022-23 led by refining and telecom business.
State-owned refiners
For listed state-owned refiners, the current dynamic in the energy sector is a bittersweet pill. While their refining business did well in the March quarter tracking rise in global refining margins, sharp losses in the oil marketing business managed to more than offset any gains.
Bharat Petroleum, Indian Oil and Hindustan Petroleum reported 19-76 percent year-on-year decline in net profit for the March quarter even as sales jumped 26-43 percent on-year.
While the demand environment for automobile and jet fuel will remain strong in 2022-23, according to analysts the benefits to earnings for the three state-owned refiners remains uncertain.
“The strong refining margins will be partly offset by the likely losses on the oil marketing side but at this point of time everything is too uncertain to have a defined view on these stocks and that is reflective in their (valuation) multiples,” said an analyst at a large bank-sponsored brokerage firm on condition of anonymity citing regulation.
Analysts believe fear of government interventions in retail fuel pricing to ease the burden of inflation on consumers could keep earnings expectations for state-owned refiners muted.
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