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Pandemic impact on fuel products may weigh on oil sector in the 1st quarter

Energy shares have climbed over the past three months, but Reliance Industries Ltd stood apart as its shares touched an all-time high on Friday. While RIL has jumped on the back of recent stake sales in its telecom arm, the spotlight will shine on the energy segment when it reveals Q1 results this week. As such, covid-led demand disruptions have constrained margins and tapered expectations in the segment.

The general refining environment was restrained last quarter as the pandemic-induced restrictions curtailed demand for fuel products. Margins of all refiners will bear the brunt. Benchmark Singapore refining margins were estimated to have dropped to a negative $0.9 a barrel in the June quarter. Nevertheless, higher discounts from West Asia would alleviate the blow to some extent. Nomura Financial Advisory and Securities (India) Pvt. Ltd expects RIL’s gross refining margin at $6.1 a barrel for the June quarter, which would be the lowest in a decade. “Realised margins would also be lower due to lower domestic sales and higher exports,” wrote Nomura analysts in a 22 July report.

RIL’s petchem volumes are expected to be lower and that will weigh on the segment’s profitability. Nomura expects RIL’s standalone earnings to have plunged 49% year-on-year. The company’s energy and retail businesses are expected to stay sluggish in the past quarter. Yet, its digital services division would benefit from tariff hikes in December, possibly helping compensate for the overall weakness to some extent. For the state-run oil-marketing companies (OMCs), refining margins are expected to be thinner and marketing volumes lower. But, better marketing margins would be something to cheer about. OMCs include Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd and Indian Oil Corp. Ltd.

Centrum Broking Ltd analysts said: “While year-on-year performance for the OMCs remains weak, we see the lack of inventory losses in Q1FY21 and sustained strength in marketing margins driving a robust improvement in Ebitda.” Ebitda is earnings before interest, taxes, depreciation and amortization. BPCL’s shares have rallied about 20% in the past few trading days owing to a privatization buzz. Vartharajan Sivasankaran, senior vice-president, Systematix Shares and Stocks (I) Ltd, said: “There is renewed optimism that the divestment would be completed this fiscal year. With crude prices falling, there were worries that bidding interest would be muted, but recent news reports indicate there is much interest from investors in BPCL.”

Coming back to the Q1 results, earnings of oil and gas producers—Oil and Natural Gas Corp. Ltd and Oil India Ltd—are likely to have dropped sharply, as crude prices were lower, leading to reduced realizations. Besides, the outlook for production and volumes is hazy.
Source: Live Mint

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