Oil companies Dependence on Centre

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Oil companies : Dependence on Centre (updated - 26 July 2010)
The three oil marketing companies (OMCs) as the government announced partial price decontrol in the last week of June is likely to prove short-lived as two of the three oil majors posted heavy losses for June quarter.

After spurting between 18% and 35% within a week of the announcement, the three scrips have already started losing steam and have lost between 5% and 8% from their peak. The losses for the June quarter that HPCL and Indian Oil announced after markets closed on Friday, although not entirely unexpected, could dampen the investor confidence further.

Crude oil prices averaged around $78 per barrel during the quarter, which was third-highest than the year-ago period. While the retail fuel prices remained controlled for the entire quarter, higher oil prices necessitated a higher support from the government to OMCs. Although the upstream oil PSUs upped their support nearly 12 times that in the June 2009 quarter, the government failed to make good its part of the losses. As a result, the two oil cos ended up absorbing a humungous amount of `10,300 crore towards under-recoveries on selling oil products below their costs during the quarter. Their combined accounting loss stood at `5,273 crore for the June quarter against a net profit of `6,059 crore year ago.

For Indian Oil, its diversification strategy to reduce dependence on oil retailing failed to pay any dividends as the petrochemicals business too posted losses. With the global refining industry weakening, IOCL’s gross refining margin slumped to $3 per barrel from $7.36 year ago. Its interest costs zoomed up 71% to `571.2 crore while it booked a forex loss of `467.5 crore against a gain of `652.8 crore in the corresponding quarter of last year.

HPCL reported a 20% drop in refinery throughout the quarter as its Mumbai refinery underwent a planned shutdown. Its GRMs weakened to $3.7 per barrel from $5.7. The company, however, reduced its interest burden by 27% to `197 crore for the quarter, thanks to lower interest rates and better treasury management.

As it increasingly becomes clear that the three OMCs would continue to depend on the government and upstream support for their profitability despite the price revisions in this month, the companies risk further erosion in their market capitalisation. Their high dependence on the state support means they continue to lack any control over their own profitability besides permanent liquidity problems.

Commissioning of BPCL’s Bina refinery - and its much-talked about IPO - and HPCL’s Bathinda refinery over the next 12 months should keep investors slightly more positive on these companies. However, rather than fundamentals, their valuations will be driven more by news flow