Reliance Industries, BPCL hope to improve refining biz after muted Q1

BPCL also expects the government to compensate liquefied petroleum gas (LPG) under-recoveries in the coming months

The state-run Bharat Petroleum Corporation (BPCL) and private refiner Reliance Industries (RIL) pin their hopes on the US driving season among other factors to improve refining prospects in the current financial year (FY25) after reporting weak first quarter results.

“When you see in the near-term to medium-term, there are factors at play like driving season demand (which) normally results in increase in demand for gasoline,” V Srikanth, chief financial officer (CFO) for RIL told analysts during a call on Friday while commenting on the oil-to-chemicals (O2C) business.

Finance executives from BPCL expressed a similar hope during a call with investors on Saturday. The company executives informed analysts that they expected product cracks to increase in the coming quarters due to the US driving season, leading to a lowering of inventories and better gross refining margins (GRMs).

 

Cracks refer to the difference between the price of a barrel of crude oil and that of a specific product refined from it. The US Memorial Day is said to mark the start of the US driving season, which leads to an uptick in demand for transportation fuels, thus bearing an impact on global sentiments for the fuel market.

RIL’s Ebitda for the O2C segment was down 14 per cent from a year ago to Rs 13,093 crore, which the management noted was primarily driven by weakness in gasoline cracks. The O2C segment’s weakness also drove RIL’s overall net profit down 5.5 per cent on a year-on-year (Y-o-Y) basis. Ebitda is earnings before interest, taxation, depreciation and ammortisation.

BPCL’s also reported a 73.2 per cent dip Y-o-Y in its net profit to Rs 2,841.5 crore for Q1, owing to weakness in refining margins. The Average Gross Refining Margin (GRM) for BPCL was at $7.86 per barrel, down from $12.64 per barrel a year ago.

“Geopolitical tensions in the West Asia, in Russia-Ukraine, the disruptions in the Red Sea, the impact on freight. So, all these have kept the markets volatile, and in the short term, increase in supply with whatever balance capacities that come in, as well as the fact that some of the refineries will come back from post maintenance,” Srikanth from RIL said, adding that one will need to wait and watch for further refining capacities additions globally, which weigh on the refining margins. "The (O2C) business remains fairly very constructive," the CFO added.

BPCL also informed analysts of a Rs 1.5–1.7 trillion capital expenditure over the next four to five years.

“We believe this is likely to skyrocket debt and shall heavily weigh on returns of capital employed,” noted analysts at Nuvama in their note on the company.

In the current financial year, BPCL plans to invest about Rs 16,400 crore. BPCL also added it expected a cost escalation of $3.5 billion for its Mozambique LNG project, which is currently under force majeure.

BPCL also expects the government to compensate liquified petroleum gas (LPG) under-recoveries in the coming months. Analysts with Nuvama noted that BPCL’s cumulative LPG under-recoveries stood at Rs 2,000 crore at the end of Q1 and is likely to increase as “current LPG margins are in the red, which is likely to continue.”

The company is scouting for a location to set up a new green-field refinery on the east coast of India. It is yet to finalise other details to address a 5.5 million-tonne gap in market share and its own refining capacities. BPCL also informed analysts it witnessed a decline in its diesel market share and expects the trend to reverse in the coming quarters.