Q3FY16 Oil Sector: Earnings likely to recover from Q2 low

Prabhudas Lilladher | June 2, 2014, midnight

Oil & Gas

Q3FY16 oil sector earnings are likely to recover from Q2 lows which were hit by inventory losses, a function of sharp crude price fall. OMC’s QoQ earnings are likely to ride on the back of lower inventory losses, higher marketing earnings and improved refining profitability. Meanwhile upstream earnings will be impacted by lower crude oil prices (Brent down 13% QoQ) even as lower subsidy burden and depreciating exchange rate (US$/Rs avg 65.9; down 1.5% QoQ) will provide support.

Downstream: We expect OMCs to report Q3 PAT of Rs47.1bn led by higher refining margins (Singapore GRMs of US$8/bbl v/s Q2 avg of US$6.3/bbl). Refining margins have got support from improved diesel spreads (Q3 avg of US$~12/bbl v/s US$10.8/bbl in Q2) and higher naphtha margins. OMC earnings will also get a lift from higher marketing margins. Diesel gross margins of Rs2.1/litre v/s Rs 1.9/litre in Q2 even as petrol gross margins remain flat at Rs2.9/litre, in our view.

Meanwhile, inventory losses will continue to remain a drag, albeit on a much lower scale given that Q3 average Brent correction was at 13% against 19% in Q2. Also, change with respect to crude price change on a quarter end basis stands at ~US$12/bbl in Q3 v/s US$14.4/bbl in Q2. We estimate overall inventory losses at ~Rs27bn against losses of Rs74bn in Q2 as product price correction were at 2‐3% for Q3 against ~9% in Q2.

Upstream: Upstream companies are expected to report earnings of Rs38.6bn (‐ 30% QoQ) led by lower crude oil prices. Earnings impact is partly nullified by lower subsidy outgo (Rs3bn v/s Rs7bn in Q2) and weak exchange rate. We have factored in upstream subsidy only for kerosene losses over Rs12/litre.


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