Doubling premium over Singapore benchmark tough for RIL’s margins

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A 15 per cent higher gross refining margin (GRM) than what analysts expected for Reliance Industries Ltd (RIL) is at the core of its 18 per cent jump in net profit during April-June. But, despite the country’s largest private sector petroleum company trying to convince analysts on what led to this jump, they are questioning whether the GRM can be sustained over the coming quarters.

The firm earned $11.5 margin, on an average, from its two refineries in Jamnagar in turning out petroleum products by processing a barrel of crude oil. Called GRM, this margin stood at $10.8 in the preceding quarter, ending March. The company maintained smart inventory management and sourcing of crude oil had helped in outperforming analyst expectations. Analysts had expected GRM to decline in the June quarter to $9.5-10, since the benchmark Singapore GRM had slid 35 per cent sequentially (from $7.5 a barrel) and 38 per cent year-on-year ($8 a barrel).
By RIL’s own admission, a GRM of $11.5 is a premium of $6.5 over Singapore. This premium more than doubled from $3.1 in the previous quarter ending March 31, 2016. S P Tulsian of sptulsian.com estimated the June GRM included inventory gains of about $2.5 a barrel.

Analysts do not see inventory gains benefiting as in the June quarter. “It is in the nature of business that the gains may not be replicated in the current quarter ending September,” a senior company executive who did not want to be named told Business Standard.

The price of crude oil has been on a declining in the month of July. If there is a significant spurt in the later part of the quarter, some inventory gains cannot be ruled out.

Analysts at ICICI Securities in a July report said the GRM premium to Singapore is mainly driven by a light-heavy crude spread. Arab heavy-Dubai and Venezuelan crude spreads, relevant to RIL refineries, have contracted in June and July from levels in the previous two months. This contraction of spread would hit the GRM if the trend continues in the coming months.

In a post-results presentation, the company maintained refining witnessed strong product demand, and margins, therefore, rose, pulling up the earnings before interest and tax (Ebit) from the marketing and refining segment by almost 26 per cent over the previous year to Rs 6,593 crore. The share of refining Ebit increased to 70.4 from 64.4 per cent in the previous year.

While a questionnaire sent to the company remained unanswered, the executive quoted above said primarily two factors helped the company. Its inventory of crude oil was built on a lower price. Brent averaged 34 per cent higher sequentially in the June quarter. The company processed 16.8 million tonne of crude in the three months to March.

Inventory, however, is not the only factor, since it is the cracks or the price differential between crude oil and a product which gives refiners greater comfort, says the executive. Strength in gasoil (diesel) cracks, besides leveraging refinery flexibility to maximise gasoline (petrol) helped, the firm said in its presentation. “Active feedstock management, operational flexibility, energy efficiency, reduced costs by fuel mix optimisation helped achieve lower cost,” it said.

Ambreesh Baliga, an independent market expert, said the company had carried over an overall inventory of Rs 47,000 crore at the end of March quarter, which must have largely comprised crude and derivatives (petrochemicals), besides others like packaging material.

Further, analysts say, benefits accrued as the company had nil exposure to products as furnace oil whose cracks underperformed. Besides, it increased procurement from new sources in the West Asia and increased direct placement of premium gasoline grades in Latin America and the US.

The company attributed $6.5 a barrel premium over benchmark GRM to sales volumes being maintained despite lower crude processing. Middle distillates having favourable slate and crack spreads, besides crude sourcing benefits due to narrowing Brent-Dubai differentials and lower furnace oil cracks.

Robust risk management was another important factor that led a strong premium over benchmark GRMs.