PSU oil companies continue to struggle

FY 2019-20 is turning out to be a forgettable one for the public sector oil companies. Weak fuel prices, declining output and a tepid refining market environment are taking a toll.

Upstream upset

In the December 2019 quarter, the PSU upstream companies (oil and gas producers), ONGC and Oil India, saw their profits nearly halve from the year-ago period. ONGC’s consolidated profit in the quarter fell about 48 per cent y-o-y to ₹4,903 crore, while Oil India’s consolidated profit dipped 50 per cent y-o-y to ₹709 crore.

This crash was primarily due to two factors – lower price realisation due to weak oil prices, and fall in output. In the December quarter, ONGC’s price realisation for its oil sales (about $60 a barrel) was nearly 10 per cent lower than in the year-ago period, while Oil India’s oil price realisation (about $63 a barrel) was about 5 per cent lower.

ONGC’s oil output declined 1 per cent y-o-y in the December quarter, while Oil India’s output fell about 11 per cent.

Gas output and price realisations also fell for both the companies.

Oversupply conditions in the global market have led to the decline in fuel prices, while old fields in decline and environmental issues have contributed to the dip in the output.

For the nine months ended December 2019, ONGC’s consolidated profit has fallen about 35 per cent y-o-y, while Oil India’s profit has dipped about 33 per cent.

Downstream downer

The PSU downstream companies (oil refiners and marketers) - Indian Oil, BPCL and HPCL – have seemingly done much better than their upstream counterparts in the December 2019 quarter. The consolidated profit of these companies nearly tripled y-o-y to ₹2,684 crore (Indian Oil), ₹1,776 crore (BPCL) and ₹1,027 crore (HPCL). But this strong performance was driven by a low base effect (the December 2018 quarter was a very weak one) and inventory gains that propped up the reported gross refining margins of these companies. The core refining margins of these companies were, in fact, lower than in the year-ago period, due to weak economic conditions - this was a continuation of what was seen in the prior quarters. Volume growth also remained weak.

For the nine months ended December 2019, Indian Oil’s consolidated profit has fallen about 39 per cent y-o-y, HPCL’s profit has dipped 20 per cent and BPCL’s profit has stayed flat.

Coronavirus impact

The ongoing March 2020 quarter could be a washout for the PSU oil companies. In the wake of the coronavirus (Covid-19) outbreak and spread across many countries of the world, global oil prices have crashed due to worries about large-scale demand destruction. Brent oil is now trading below $50 a barrel, down from $66 as of end-December. This will likely show on the financial performance of the upstream companies ONGC and Oil India. The refining market environment also remains weak due to global growth worries. While low oil prices could translate into higher refining and marketing margins for Indian Oil, BPCL and HPCL, these companies could suffer major inventory losses due to the fall in the prices of crude oil and refined products such as petrol and diesel.

No surprise then that the stocks of all these oil companies have been hammered on the bourses over the past few months. This could have an impact on the Centre’s plans to get big money from the proposed strategic divestment of BPCL; the stock is down nearly 23 per cent since mid-November.