LPG price recovery may mean upgrades for OMCs

ET Intelligence Group: A recovery in the liquefied petroleum gas (LPG) prices, which accounts for nearly 5-8% of the total refining output of the OMCs, is bolstering the favourable petroleum product cycle that has been continuously boosting refining margins of oil marketing companies.

In November, refiners’ LPG margins hit a 7-month high improving by 20% of the average of second quarter — thanks to higher offtake by China due to the commissioning of new propane dehydrogenation (PDH) plant and seasonal winter demand. LPG prices have inched up to $410/tonne in November from $290/tonne — low it touched in August 2016.

The quantum of increase in regional LPG prices indicates gross refining margins (GRMs) of OMCs could increase by $0.3-0.4 per barrel in the current fiscal. This could translate into earnings upgrades in the range of 3-8% for Hindustan Petroleum (HPCL), Indian Oil, and Bharat Petroleum (BPCL).

The projected earnings per share of HPCL, Indian Oil and BPCL is expected to be Rs 44.30, Rs 32.06 and Rs 50.97, respectively, for the current fiscal, Bloomberg data showed. HPCL produced 405 thousand and 419 thousand tonne of LPG at its Mumbai and Vizag refinery, respectively, in the previous fiscal, according to the company’s FY16 annual report.

It must be noted that in the last three months, GRMs of OMCs have benefitted from the strength in prices of fuel oil, a refinery output used to produce electricity and fuel ships. Improving margins for fuel oil could potentially add another $0.6 per barrel to GRMs of Indian Oil and HPCL.

The combined impact of the uptrend in the margins of fuel oil and LPG means EPS could have the potential to add 15-18% to the annualised earnings. Typically, every $1/barrel improvement in the GRM adds 12-14% to the earnings of an oil marketing company.