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Illustration: Ajay Mohanty
With a tough June 2024-ended quarter (Q1FY24) owing to weakness in refining margins, state-run Bharat Petroleum Corporation (BPCL) and private refiner Reliance Industries (RIL) pin hopes on the US driving season and other factors to improve refining prospects in FY25.
“When you see in the near term to medium term, there are factors at play like driving season demand, which normally results in an increase in demand for gasoline,” said V Srikanth, chief financial officer (CFO) for RIL, in a call with analysts on Friday, commenting on the Oil-to-Chemicals (O2C) business.
Finance executives from BPCL expressed similar hope to investors in a call on Saturday. The company executives informed analysts they expect product cracks to increase in the coming quarters, led by the US driving season, leading to lower 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 sees an upshoot in vacation-led 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 amortisation.
BPCL 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.
Srikanth from RIL noted, “Geopolitical tensions in the Middle East, 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, an increase in supply with whatever balance capacities that come in, as well as the fact that some of the refineries will come back post-maintenance,” adding one will need to wait and watch for further refining capacity additions globally, which weigh on the refining margins. The executive added that “the (O2C) business remains fairly very constructive.”
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 with Nuvama in their note on the company.
In the current financial year, BPCL plans to invest about Rs 60,400 crore.
BPCL also expects the government to compensate liquefied petroleum gas (LPG) under-recoveries in the coming months. Analysts with Nuvama noted, BPCL’s cumulative LPG under-recoveries stood at Rs 2,000 crore at the end of Q1 and noted this is likely to increase as “current LPG margins are in the red, which is likely to continue.”
Further, the state-run company added it is scouting for a location to set up a new greenfield refinery on the east coast of India, yet to finalise other details, to address a gap in potential market demand 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.
First Published: Jul 21 2024 | 5:06 PM IST
