Expect crude prices to remain stable in March; post healthy margins in Q4: HPCL

With regards to crude prices he said they have stable for some time now and expect them to remain so through March on back of strong compliances from OPEC, strong supplies from the US and Asian refineries shut down helping keep demand in check.

However, in Q2CY18, the demand is expected to improve because Asian refineries will start, driving season will be back, Ramadan season etc.
He is also upbeat on the margin front because the gross refining margins and marketing margins for the company have been good.

Volumes also have been good on back of strong demand, he said. From April to February, MS has seen 10.5 percent growth, while diesel and LPG volumes have grown 8 percent. Therefore, altogether volume growth has been in range of 6.5 percent till date, in FY18.

Talking about the merger with ONGC, he said both the companies are working out synergies and MRPL is one of the items. However, right now it would be premature to define the contours of the merger, he added.

Below is the verbatim transcript of the interview.

Anuj: Right now how is the business looking, you have of course the refining and the marketing both parts tell us how is it shaping?

A: So, let us start from crude. Crude is more stable than what is used to be one year back. Basically, because of strong compliances from Organization of the Petroleum Exporting Countries (OPEC) side to keep it not going much below. At the same time strong supplies from US, US supplies has also gone I think almost at around 10.8 million barrels a day. So, right now crude prices are stable. We expect it to be stable at least through March because the Asian refineries shut down seasons are right now on which checks the demand under control.

In the second quarter, probably the demand will improve, the Asian refineries will be back, Ramadan season will be there, driving season then we can see some strength on the crude side. As far as cracks are concerned, right now because of the refinery shut down period the cracks are stronger. Liquid petroleum gas (LPG) prices are lower and likely to be weaken because of the more supplies from US. But gasoline and gas oil cracks should be good that is my feel on this.

Latha: When you say cracks are good, can you give us an idea as to what they are at and your own margins, can we be reasonably sure that they will be higher this quarter and how much better than last quarter?

A: As far as gasoline is concerned it is in the range of let us say USD 11-12 or 13-14 maybe and gas oil in USD 14-16 because the gas oil, the inventory base is low and demand is good. As far as gasoline is concerned right now because the refineries are shutdown so the demand will be there. Then the driving seasons etc. will start in Q2 season. So, the gasoline cracks should be in the range of USD 13-14 and gas oil cracks in the range of USD 14-16.

North American Free Trade Act (NAFTA) cracks are slightly softer because of the weaker LPG because this goes to crackers and there are some of the crackers are also under shutdown. So, NAFTA cracks are lower.

As far as the oil marketing companies are concerned right now because of the crude prices have come off from the higher side the cracks are good. So, the business at our side specially the companies who have got refinery in marketing portfolio should be good and we expect to post a healthy margins in Q4.

Sonia: When you say healthy margins what would you be looking at because the trend for retail fuel margins has been on the upside for a while? What kind of an average are we looking at going ahead?

A: I won’t be willing to probably give a specific numbers to the marketing margins etc. but there are two components, the gross refining margins (GRMs) are good right now as I mentioned and Q4 I expect to be strong GRMs. Marketing margins we are able to recover the cost and the expenses which we have, so there are no under recoveries to that extent and we should be able to do good.

Latha: How are volumes doing?

A: Volumes are good, this year especially 2017-2018 the overall demand growth has been quite good. MS had been almost from let us say April to February almost 10.5 percent growth, diesel is around 8 percent growth, LPG is around 8 percent growth, so overall all products if you put together it is almost in the range of 6.5 percent. Even the same thing is backed by the demand in the auto sector, two-wheeler sectors. Almost the total product consumption in the country has crossed 200 million metric tonne. So growth has been quite good and it is sustaining. In fact the MS has put up almost 2 million tonne every month additional, so it is quite strong and the momentum is continuing as well.

Anuj: Two part question on this ONGC issue? Do you expect integration to be smooth and the relationship between the two companies does it remain at arm’s length or does HPCL gets a bit of a preference in terms of the crude oil sourcing from ONGC?

A: We are still working out the synergies. As far as crude oil is concerned it remains at arm length because in country as per the contracting arrangements which we have what we call production sharing contracts in that the government has got a right to allocate the crude. So, even today also if a company has got a crude oil wells and also processing arm they do not automatically have the right of the crude for themselves. Except for the concessions are newer, rounds which are coming there are certain more liberalisation has been done especially like gas in the high pressure high temperature zones are with the small field rounds where there is a freedom to supply the crude to anybody and at the price which is market driven. So, as far as ONGC-HPCL is concerned the present supply fields it is arm length. The other synergies we are working out.

Latha: We are even more interested on the HPCL Mangalore Refinery and Petrochemicals (MRPL’s) situation. Can you give us some update on what are the acquisition plans if any and if it is an acquisition is it cash, is it share?

A: We are working out the overall synergies between the two companies because there are multiple points where we can create synergies and MRPL is one of the items in that and we will be discussing that. So, once more concrete thoughts are available and we have worked out the thing then we will definitely let you know. But otherwise right now it will be slightly premature to define the contours.