The recent March quarter results of the PSU oil majors present a stark contrast. While the oil and gas explorers - ONGC and Oil India - took a knock on the bottom-line, refiners - Indian Oil and HPCL – saw their profits jump sharply. Unlike its refining peers though, BPCL’s profit fell year-on-year.
The fall in the March quarter profit of ONGC (down 6 per cent y-o-y) and Oil India (down 96 per cent) was primarily due to two factors - low gas prices and royalty expenses. The half-yearly revision of domestic gas prices as per the formula laid out by the government resulted in the fuel's price crash nearly 35 per cent y-o-y to just about $2.5 per mmbtu in the recent March period. The other major drag was the one-time royalty expense, a result of the settlement of the disputes with the Gujarat and Assam governments. ONGC booked an expense of Rs. 2,444 crore as differential royalty while Oil India’s expense on this count was Rs. 1,152 crore. The silver lining is that the resolution of the dispute has removed a major contingent liability overhang – over Rs. 10,000 crore for Oil India and nearly Rs.15,000 crore for ONGC. But for the royalty expense, the profit of the companies would have been much higher in the recent March quarter. While low gas prices were a drag, oil prices were much better (up more than 50 per cent) in the March quarter compared to the year-ago period. Also, oil and gas production was up for both the companies, and the subsidy burden was nil.
It was not just the upstream companies that benefited from higher oil prices. Inventory gains on oil and petro-products helped buoy the profit of refiners Indian Oil (up 85 per cent y-o-y) and HPCL (up 31 per cent). Strong refining margins helped too. Indian Oil’s gross refining margin rose to $8.95 a barrel in the recent March quarter from $2.99 in the year-ago period, while that of HPCL rose to $7.99 a barrel from $7.51 a year before. But BPCL bucked the trend with a profit decline of about 13 per cent y-o-y in the March quarter. This was due to its gross refining margin falling to $6.01 a barrel from $6.3 in the year-ago period. The refining margin was also lower than that of peers. The stabilisation of BPCL’s Kochi refinery expansion seems to have contributed to the lower margin. Also, a sharp increase in employee expenses played spoilsport.
While the March quarter results of the oil companies have been a mixed bag, the full-year 2016-17 was a good one for most upstream and downstream companies. The consolidated profit of ONGC for the year rose 64 per cent, while that of Indian Oil, HPCL and BPCL increased 65 per cent, 76 per cent and 15 per cent respectively. Only Oil India saw its consolidated profit fall 23 per cent in 2016-17, largely due to the royalty expense impact, but for which profit would have been higher than the year-ago number. Also, all the PSU oil companies issued bonus shares last year.