The oil and gas industry has been in the spotlight since the Ukraine-Russia debacle, thanks to the massive supply disruptions and resultant volatility in global oil and gas prices. Historically, higher oil prices have helped refiners through inventory gain and higher realisation on refined products such as petrol, diesel, and aviation turbine fuel, amongst others. Likewise, a fall in crude prices does not augur well for refiners and marketers.

However, in 1QFY23, even as Indian downstream companies enjoyed record gross refining margins (GRM), this did not translate into a net profit for oil marketing companies such as Indian Oil Corporation (IOCL), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) due to lower retail prices of petrol and diesel and the subsequent marketing losses. However, Reliance Industries, the largest private sector refiner, and other refiners such as Mangalore Refinery and Petrochemicals (MRPL) and Chennai Petroleum (CPCL) benefited from the higher crude prices and refining margin, given its negligible presence in the oil retail sales segment.

Q2 outlook

In the June-September 2022 quarter, Oil refining and marketing companies are expected to report lacklustre performance on three counts.

First, the fall in oil price from the over USD 120 per barrel level to a low of USD 82 a barrel will result in inventory losses for oil refiners since the prices were high in the early part of the quarter. This is precisely the reverse of the April-June 2022 quarter.

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Second, the realisation of downstream products such as aviation turbine fuel and other crude derivatives have also come off sharply in the last couple of months, which will mean lower realisation and refining margins for refiners. The Singapore GRM, which is considered a good proxy for Indian refiners’ margins, as per reports, has contracted from USD 20.93 a barrel in 1QFY23 to USD 8.29 a barrel in 2QFY23.

Third, the imposition of a windfall tax on domestic oil production and export of downstream products such as petrol, diesel and ATF will further add to the margin pressure for refiners and crude oil producers such as Oil and Natural Gas Corporation (ONGC). Since the imposition of the windfall tax in July 2022, global crude oil prices have been on a correction spree. Though the Government had been reviewing and revising the tax, in line with the global crude and downstream products, the additional outflow for already loss-making oil marketing companies will hurt profitability in the 2QFY23.

The only silver lining for oil marketing companies has been the small respite in marketing margins – thanks to the fall in crude oil prices and stable retail prices of petrol and diesel in the home market.

In 2QFY22, oil refining and marketing companies were profitable – Indian Oil Corporation, for instance, reported a net profit of ₹6,141 crore in the September 2021 quarter, while HPCL and BPCL posted a net profit of ₹2,004 crore and ₹2,873 crore, respectively. In 1QFY22, barring Indian Oil, which reported a profit of ₹883 crore, BPCL and HPCL reported losses of ₹6,148 crore and ₹8,557 crore, respectively.

In 2QFY23, oil marketing companies – IOCL, BPCL and HPCL are expected to post a decline in revenue sequentially, though the revenues will be higher year-on-year due to the high price of crude and downstream products. The losses are expected to widen for IOCL and BPCL in July-September 2022. Reliance Industries, which has minimal marketing presence, will also see a sequential drop in revenue and profits due to the lower refining margins. Likewise, Chennai Petroleum (CPCL) and Mangalore Refinery and Petrochemicals (MRPL) will likely moderate the net profit sequentially, though the year-on-year profit performance may be flat to marginally positive.

Exploration companies

For ONGC and Oil India, the windfall tax on domestic production is expected to limit the profits in the 2QFY23. While the revenues for both will be higher than in the same period last year, profitability may be flat to marginally lower in the September 2022 ended quarter.

In the last six months, the stocks of refiners - Reliance, IOCL, HPCL and BPCL have fallen by 7 to 28 per cent, with Reliance falling the least (7 per cent) and HPCL (28 per cent), the most. The only exceptions have been south-based refiners – MRPL and CPCL - which have gained 10 and 34 per cent, respectively.

Even as the overall 2QFY23 performance is expected to be weak, yesterday’s announcement of a one-time grant of ₹22,000 crore for oil marketing companies to compensate for losses on LPG (liquified petroleum gas) can provide some respite to the financially beleaguered oil marketing companies. The extent of the benefit in Q2, though, will depend on how this compensation will be accounted for.