Profitability of oil exploration companies is set for a rebound of around 25 per cent this fiscal year, but oil marketers will see a hit of around 10 per cent due to high crude prices, says a report.
But the report, penned by Crisil today, said profitability of oil marketing companies (OMCs) will improve in fiscal 2020 as it does not expect the crude prices to sustain at the current high levels.
However, the rising crude oil prices - the Brent crossed USD 74 a barrel mark today - are unlikely to impact their operating margins this fiscal year given the cushion available in marketing margins.
"Including under-recoveries, operating margins of oil marketers are expected to decline 13-15 per cent this fiscal year. But some inventory gain to the tune of USD 1-1.5 a barrel in the coming quarters may provide a modicum of offset. Net operating margins are seen declining 8-10 per cent," Crisil said in the report.
"With crude prices expected to retract next fiscal, marketing margins would rebound and bolster the operating profits of OMCs," it added.
On exploration companies, it said, "Operating margins of upstream companies are seen rising 23-25 per cent on account of higher realisations driven by increase in crude prices. The numbers can rise another 1,000 basis points to 33 -35 per cent if these companies aren't forced to share under- recoveries equally with downstream players".
Marketing margins on petrol and diesel rose as much as Rs 3-3.5 a litre in fiscal 2018 after daily pricing was introduced from June 16, 2017. Sharing of additional under- recoveries on LPG and kerosene will lower profitability of OMCs by 3-4 per cent.
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Crude prices shot up 24 per cent in the first three months of 2018, and touched a 40-month high in April, owing to continuous decline in global inventories driven by production cuts by the oil cartel Opec and geopolitical tensions.
"We expect crude to average USD 70 a barrel for calendar 2018, a 27 per cent rise on-year. Consequently, the country's oil import bill is expected to swell by 26 per cent to Rs 6.5 trillion this fiscal year," the report said.
According to the rating agency, retail prices of petrol and diesel have peaked because of flaring crude prices and rising excise duties, which have risen significantly since 2013-14, accounting for 22 and 25 per cent of retail prices of petrol and diesel, respectively, compared to 12 and 15 per cent earlier when crude was trading at similar levels.
"If spike in crude prices is not fully passed on to consumers, marketing margins of OMCs will drop by 80 paise to Re 1 a litre. However, that would still be better than the Rs 1-1.5 a litre margin they have earned historically," it added.
Any further rise in crude prices could force the government to ring-fence consumers by restraining OMCs from passing on the increases fully, especially given the political cycle. The government is not expected to reduce excise duties to influence prices, as they have to maintain their tax revenue targets for the year.
The budget 2018 has assumed the average price of the Indian crude basket (weighted average of Dubai and Oman crude, and Brent) to be USD 57.50 a barrel, and estimated the petroleum subsidy for the year at a low Rs 24,900 crore.
However, with Brent crude soaring to over USD 70 per barrel now, the subsidy amount can rise to Rs 35,000 crore on LPG and kerosene, or Rs 10,000 crore more than what has been budgeted, the report said.