How IndianOil weathered inventory valuation losses
New Delhi 18-Jun-2015
The global crude oil price decline that wreaked havoc on the financials of oil companies last year, has left Indian Oil Corporation (IOC) with a key learning: how to weather inventory valuation losses.
The nation's largest fuel retailer saw its net profit dipping 18 per cent to Rs 5,727 crore in 2014-15 from Rs 7,019 crore in the previous financial year largely due to a Rs 15,600 crore loss on the value of inventories of crude oil and petroleum products it maintained.
"The extent of the impact of the valuation loss resulting from the crude price slump can be understood from the fact that our crude purchase volumes rose marginally from 51.4 million tonnes in 2013-14 to 52.4 million tonnes last financial year, but the purchase value came down by around 20 per cent to Rs 194,600 crore," IOC chairman and managing director B Ashok said.
He added the company countered the impact of the valuation loss by adopting a multi-pronged strategy that included improved physical performance, fiscal prudence and gains from diversified business. Crude procurement - the type of crude (high sulphur or sweet) and how it is processed - offered a fundamental profit opportunity.
The strategy had three broad pillars. First, IOC increased its capacity to process cheaper crude in some of its refineries on the western coast. The company was earlier blending the Rajasthan crude with cheaper grade to the extent of less than 14 per cent. In 2014-15, blending was raised to 16 per cent for the Panipat refinery and 17 per cent for the Gujarat refinery.
The better heavy crude processing ability resulted from improved blending infrastructure and led to maximisation of Mangla crude processing across refineries. "More processing of the heavier Mangla crude led to improved margins. This, along with the reduction in fuel oil loss in refineries and streamlining the crude procurement process, helped improve competitiveness and profitability despite inventory losses," said a senior executive of the company who did not wish to be named.
Second, IOC expanded its crude basket, adding eight new types of crude oil to its portfolio in 2014-15 alone. The company can today process 174 different types of crudes in its refineries, an improvement over the ability to process 166 crudes in 2013-14 and 146 in 2012-13. "The new types of crude added to the portfolio include those sourced from Latin American nations like Colombia," the IOC executive said. Third, the company also changed its crude procurement practice. The time of processing of tenders has been substantially brought down from 36 hours to nine. "This enabled the company to get larger offers and better prices," Ashok said.
The global crude oil price slump started in June 2014 from a level of $114 per barrel. By the end of the second quarter in September, IOC had registered an inventory valuation loss of close to Rs 1,800 crore, which led to a net loss of Rs 898 crore in second quarter against a net profit of Rs 1,683 crore in the corresponding quarter of 2013-14. With crude price continuing to slide, the situation worsened in the December quarter, when IOC registered valuation losses of Rs 12,842 crore.
In the fourth quarter, however, the company registered total inventory losses of Rs 871 crore. "This comprised an inventory gain of Rs 374 crore on crude and inventory loss of Rs 1,245 crore on products," the IOC executive quoted above said. The company reported a net profit of Rs 6,285 crore during the fourth quarter against Rs 9,389 crore in the corresponding quarter of the prior year mainly because of the higher compensation of Rs 7,000 crore received from the government in the fourth quarter of 2013-14, which increased the base.
IOC's average gross refining margin for the January-March quarter stood at $8.77 per barrel compared to $2.17 in the same quarter a year ago. The refining margin has come down to $0.27 per barrel in 2014-15 from $4.24 in the previous fiscal, on account of the inventory valuation loss of Rs 15,600 crore.
