According to a report by India Ratings, the overall demand for fuel has come down by around 20 per cent, while capacity utilization levels have fallen to 50 per cent in March.
Typically, refining operations under 40 per cent capacity utilisation become unviable due to higher fixed operating expenses. However, capacity utilisation has remained high for OMCs whose sales to own production ratio is significantly high, as they lowered external purchases while ensuring their refineries run at full utilisation, the report said.
“If at all the national lockdown is lifted on April 14, fuel demand is set to fall to around 40 per cent in the month because of the reluctance of people to move outside, restricted air travel, slow pickup seen in industrial and commercial activities due to unavailability of manpower, and slower pickup in freight movement,” it added.
From a profitability angle, the worst hit is refining margin, which is the key profit metrics for an OMC. The benchmark Singapore gross refining margins have come down to a low USD 1.3 a barrel in March from USD 1.7 in the previous month and from USD 4.9 in FY19, which was a high USD 7.2 in FY18.
Margin on key products has trended southwards with the demand slowdown. Gasoline spreads and jet fuel cracks are hit the most, it adds.
The report expects demand disruption from people’s reluctance to use shared mobility especially shared cabs, private cabs and public transportation will be higher than the rise in fuel demand from higher use of private vehicles.
Lower refinery utilisation rates can increase the operating expenses on a per barrel basis from the present USD 2-2.5 incurred at full utilisation, lending operations unviable.
Given the Brent crude in the last 45 days have moved from USD 55-60 to USD 20 a barrel as of March-end, OMCs are likely to have incurred substantial inventory losses. OMCs typically keep inventories for 30 days, which will increase if the demand falls, forcing refineries to operate at lower levels.
However, the report does not see any liquidity crisis for the OMCs which have a consolidated debt of Rs 1.9 lakh crore in FY20, up from Rs 1.4 lakh crore in FY19 despite internal accruals plunging to a low Rs 2,80 crore on account of higher working capital borrowings, higher subsidy receivables in Q4. Under recovery in the first nine months of FY20 stood at Rs 18,640 crore, down from Rs 43,390 crore in FY19.
The agency expects the net leverage of the three OMCs combined to have increased to over 3.5x in FY20 from 2.5x in FY19.