Refinery sector profitability to decline in third quarter: analysts

The lag reflection of change in international oil prices on domestic petroleum pricing is likely to bode heavily on the refinery sector profitability in the third quarter of FY12, analysts said. "On account of these adverse spread movements, we estimate domestic refinery GRMs (gross refinery margins) to decline to $1 per barrel in the third quarter as against $2.5 per barrel (estimated) in the second quarter of FY12," Nauman Khan, an analyst at Topline Securities said.
He said the international crude oil prices (Arab Light) on the back of Iran west stand off and positive developments in Greece debt crisis has increased by 9 percent to average $119 per barrel in the third quarter of FY12 so far as against $109 per barrel in the second quarter of FY12. However, the relevant petroleum prices for the period (incorporating 1-month lag) have increased in the range of 1 percent (Kero) to 6 percent (Naphtha). This is expected to exert pressure on the domestic refinery sector profitability in the third quarter.
The GRMs, which are vital gauge of sector's profitability, is estimated to slash down to $1 per barrels as against $2.5 per barrel in last quarter, he said. Further dent to sector profitability may also come due to further increase in Arab Light crude oil prices in the remaining, Pak Rupee (PKR) depreciation against US dollar rendering into exchange loss and reduced margins bringing the sector in turnover tax regime.
He said the GRMs of ATRL are estimated to stand in the range of $2.5-3 per barrel as against $4-4.5 per barrel recorded in the pervious quarter. The company continues to outperform its domestic peers on account of its superior product mix. For NRL core-refinery margins are expected to dip in the negative to $0.2-0.8 per barrel as against positive $0.5-1 per barrel registered in last quarter. Incorporating NRL's lube business (its major revenue earner) the picture seems to be depressed as well, he added.
"The company's lube margins as per our estimates have remained under pressure in the third quarter in the range of $35-40 per barrel versus $45-50 per barrel as base oil prices has failed to follow the oil prices," he said. "Incorporating these developments, we expect refinery sector profitability to remain under pressure in the third quarter of FY12 with remedy coming in the form of possible inventory gains," he added.