The Hindu Business Line : Double whammy for oil companies

Domestic oil companies will have to contend with lower refining margins as well as the negative margins in marketing now following the retail price cut.

IT'S BACK TO troubled times for the oil companies, already borrowing in the short-term market furiously to bolster their cash flows.

The reduction in petrol and diesel prices may have come as a relief to consumers but they may just have added to the troubles of the oil companies. The cut of approximately Rs 2 in the price of petrol and Re 1 in the case of diesel has halved the margins in the former and wiped off the small profit in the latter for oil PSUs. Ironically, the price cuts have come just when things were beginning to look up for the refining and marketing companies — Indian Oil, Bharat Petroleum and Hindustan Petroleum — with margins getting back into positive territory and the government releasing two tranches of oil bonds.

The move is bound to add to their problems now because Singapore refining margins are at lows not seen in the last twelve quarters. The spread between petrol and crude oil has also dropped sharply to about $1 per barrel in the last fortnight from a hefty $10 per barrel in the first quarter. This is due to a sharper fall in the price of petrol compared to crude oil.

An important factor behind this is the rise in heavy crude oil prices. The spread between heavy and light crude oil prices, which was around $6 per barrel in the first quarter, has now narrowed to under $2 per barrel. OPEC members appear to have cut down on heavy crude oil output while complying with the overall production cut that they decided upon a month ago. This has caused heavy oil prices to go up, impacting refining margins.

Margins take a hit

It will be a double whammy, therefore, for the domestic oil companies which will have to contend with lower refining margins as well as the negative margins in marketing now following the retail price cut. Of course, there is still a full month to go in the third quarter and the oil market is a volatile place lending hope that the picture could still change in favour of the oil companies. But things now do not appear very good for them.

The Government has just released the second tranche of oil bonds totalling Rs 5,000 crore; the first release, for an identical sum, was made in October. But this is unlikely to spruce up the bottomline of the oil companies simply because they have already taken credit for this in their second quarter results.

Taking cover behind "approval received from the Government of India for issuance of oil bonds in lieu of under-realisation suffered" the oil companies had already accounted for the entire Rs 10,000 crore of bonds as receipts in the second quarter. This was when the Government had actually issued bonds for only half that amount.

As any accountant would tell you, this is anything but prudent accounting policy. You cannot account for receipts before the money is credited in your bank account, even if it is in the form of sovereign bonds from the government. The move was obviously driven by the compulsion to show a profit for the second quarter as also the first half of this fiscal.

Be that as it may, the move is now bound to boomerang on these companies, as their third quarter financials will not have the cover of oil bonds. Unless, of course, the government decides to "approve" the third tranche before the third quarter numbers are finalised to once again "help" the oil companies account them as receipts.

Bonds uncertain

There is anyway a basic doubt on whether the Government will keep its original promise, made in June, of issuing Rs 28,300 crore worth of bonds this fiscal. Parliament's approval has been obtained for only Rs 14,150 crore of which Rs 10,000 crore worth of bonds have already been issued.

With global oil prices retreating to around $60 per barrel levels and staying there, it is unlikely that the Government will issue the promised quantum of bonds. Therefore, the maximum that the oil companies can expect in the remaining part of this fiscal would be the Rs 4,150 crore worth of bonds that is still left to be issued from the total approved by Parliament.

Seen in the context of the retail price cut on petrol and diesel and the current ultra-low refining margins, this is big time trouble for the oil companies already borrowing in the short-term market furiously to bolster their cash flows. Some, like Indian Oil, have been offloading their existing bond holdings in the market to raise cash.

It is not surprising then that the stocks of Indian Oil, Bharat Petroleum and Hindustan Petroleum have fallen by around 10 per cent in the last one week. There could be a further downside in these stocks if the global oil scenario continues to develop in the fashion that it has in the last fortnight.

More Stories on : Insight | Petroleum | In Focus

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page