Oil Refineries: On monthly basis domestic GRMs would show a moderate expansion in April, 2016 given relatively improved product spreads. Lower oil prices are helping to scale up the demand (international) of the end product which is reflecting in higher products’ spread. As per our calculations, domestic GRMs would increase to US$7.5/bbl in April,2016 against US$5.5/bbl in previous month. Among the listed companies, ATRL margins are likely to outperform the industry (US$9.0/bbl), while NRL’s GRM (ex-lube) to remain around US$4.5/bbl.

Though we acknowledge the volatile nature of the GRM as a constraint on future predictability, the current oil market scenario along with modernization of local refineries should bode well for sector’s dynamics. Hence, we are cautiously optimistic on the sector and recommend accumulation in ATRL and NRL.

Impact

Higher HSD margins instigating MoM increase: The domestic GRMs for April, 2016 are calculated at US$7.5/bbl which is on a higher side compared to US$5.4/bbl (fine tuned with the actual crude oil price in March) in last month. The higher month on month increase in margins is primarily attributable to higher margins on HSD which accounts for ~37% of the product slate. The monthly margins are lower than 10MFY16 average GRMs of US$10/bbl (vs US$10.5/bbl in 10MFY15) due to current product prices catching up with the lower crude oil prices. We see this as a function of the cyclic nature of the GRM as highlighted in our previous report on GRM published last month;

Plant shutdown may create deviation in ATRL’s margins: We estimate ATRL to outperform the industry; our calculation suggests GRMs of US$9.0/bbl in April against US$7.5/bbl in previous month. However, ATRL’s throughput is relatively restricted due to on-going modernization of the plant and actual product slate may vary from our base case assumption (As per company’s notice PMG production is expected to resume from mid-April which was shutdown from January 2016). Restricted ATRL throughput due to up-gradation work is likely to keep 2HFY16 earnings under pressure but from FY17 ATRL’s GRMs are likely to improve that would reflect well on its bottom-line;

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By: Foundation Securities Limited

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Refineries 04-04-2016

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