Oil: Refining interest

The Street appears to have factored in the improved gross refining margins for domestic players.

The current surge in global crude oil prices coupled with a worldwide shortage of refining capacity has shifted focus to gross refining margins (GRMs) currently being enjoyed by Indian refiners. The regional benchmark Singapore refining margin is hovering at $5.2- 5.3 a barrel compared with $4.75 a barrel in the September 2006 quarter, point out analysts.

This improvement in the regional benchmark is attributed to stronger demand for products such as diesel, across several Asian countries. The Singapore refining margin was, however, at $9.5 a barrel in the June 2007 quarter.

Meanwhile, state-owned oil marketing companies such as Bharat Petroleum Corporation and Hindustan Petroleum Corporation's GRMs are estimated at $4-4.25 a barrel, add analysts. BPCL's GRMs at its Mumbai refinery in the September 2006 quarter were at $ 2.94 per barrel. In the case of RIL, its GRMs are estimated at $12 a barrel compared with $9.1 in Q2 FY 07, thanks to efficient purchasing, coupled with its ability to process heavy and sour crude.

Sequentially, however, the regional benchmark Singapore refining margin is lower than that of Q1 FY08, and that's attributed largely to seasonal factors. For instance, the peak driving season typically takes place in North America in May and June each year, which strongly pushes up demand for petroleum products and the resulting rise in GRMs in the June 2007 quarter.

The street appears to have factored in the improved GRMs for domestic players on a y-o-y basis. For instance, PSU refiner Bongaigaon Refinery & Petrochemicals has gained 10 per cent over two months compared with the near 6.7 per cent rise in the Sensex. RIL too has gained 21 per cent during this period and investor sentiment has also been aided by the recent approval of the empowered group of ministers for its pricing formula for gas from the Krishna-Godavari gas basin at $ 4.2 a million British thermal unit. Reliance Industries trades at 23 times estimated FY08 earnings, while PSU refiner Chennai Petroleum gets a discounting of 5.6 times estimated FY08 earnings.