Indian Oil Corporation (IOC; IND AAA/Stable), Hindustan Petroleum Corporation (HPCL; IND AAA/Stable), Bharat Petroleum Corporation (BPCL), Mangalore Refinery and Petrochemicals (MRPL), Essar Oil (EOL; IND BBB+/Stable) and Reliance Industries (RIL; IND AAA/stable), have reported robust GRMs during 9MFY16 - IOCL (9MFY16:USD5.83/bbl; 9MFY15: negative USD2.66/bbl), BPCL (9MFY16:USD6.69/bbl; 9MFY15:USD2.08/bbl ), HPCL (9MFY16:USD6.35/bbl; 9MFY15:USD1.04/bbl), MRPL(9MFY16:3.97; 9MFY15: negative USD3.58), EOL (9MFY16:USD10.45/bbl ;9MFY15: USD7.69/bbl) and RIL (9MFY16:USD10.8/bbl ;9MFY15: USD8.1/bbl).
Ind-Ra notes that refinery transfer prices (RTP) for petrol and diesel, which constitute bulk of the refinery yields, declined by around half as much as the fall in the Indian crude basket. RTPs are determined on the basis of trade parity, factoring in import and export prices in the ratio of 80:20. RTP for Bharat Stage IV petrol declined by 21% over Jan2015-Jan 2016, while the Indian crude basket declined by 42% over the same period.
The cost of fuel consumed per barrel of refined product has reduced by USD6-7, since most refiners either use crude oil or natural gas as the operating fuel for the refinery. Additionally, refiners who were relying on long-term Liquefied natural gas (LNG) for running the refineries have benefited post the re-negotiation of the contract with Ras-Gas by Petronet LNG Limited (IND AA+/Positive) as the gas prices have been linked to the three-month rolling average of Brent resulting in gas prices declining from USD13-14/mmbtu to USD6-7/mmbtu.
Apart from GRMs, the interest outgo on working capital will also remain low, as the refiners maintain inventory of almost one to two months. Assuming crude prices remain at current levels, the borrowings to maintain a similar quantity of inventory are lower. This is likely to improve the net profits. The surplus cash generation from lower interest expenses and healthy GRMs has enabled some of the refiners to prepay part of their long term borrowings which has further reduced the interest expense.
Fitch Ratings, in its report dated 24 February 2016, revised its base case price deck for Brent and WTI, driven by a combination of stock build-up through winter 2015-2016, higher-than-expected production by the Organization of the Petroleum Exporting Countries in January, and increasing evidence that global GDP growth in 2016 will be weaker than previously forecasted by Fitch. The supply surplus, although lower in the second half than the first, could therefore remain, which may limit price rises. Even with market balance, a large inventory overhang may dampen prices throughout 2017. Fitch therefore forecasts only a modest price increase to USD45/bbl, well below the USD65/bbl full-cycle price.
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