Absence of price formula, rising crude prices hamper Lanka IOC Dec. performance

The local unit of Indian Oil Corporation Limited, Lanka IOC PLC, reported a net loss of Rs.340.1 million or 64 cents a share for the October-December quarter (3Q18) from a comparable period net profit of Rs.257.5 million or 48 cents a share. 

The December quarter loss was higher than the net loss it reported in the September quarter, which was Rs.177 million. The company’s share ended 40 cents or 1.33 percent lower yesterday at Rs.29.60. The downstream operator, which imports and distributes crude oil through its storages in Kolonnawa, Muthurajawela and Trincomalee, recorded a revenue of Rs.22.0 billion for the quarter under review, up just 7.0 percent over the same period, last year.

The recent stock-out at state-owned Ceylon Petroleum Corporation during the period may have given a fillip to the top line, albeit it is not clearly visible. 

Meanwhile, the cost of sales of the company rose by a faster 13 percent year-on-year (YoY) to Rs.21.8 billion. 

Global crude oil prices are flirting at US $ 70 a barrel at the Brent futures exchange from around US $ 55 a barrel a year ago – an increase of 26 percent over the 12 months. 

Global crude prices have been rallying since the Organisation for Petroleum Producing Countries (OPEC) and non-OPEC members reached an agreement in December 2016 to cut the production so that the price could be steadied. 

The oil cartel and other oil producing nations that met last year to review the impact of the December 2016 production cut had on the prices decided to extend the cuts twice last year, which will continue until the end of this year. 

However, due to the absence of a pricing formula for crude oil and other utilities in Sri Lanka, Lanka IOC is unable to increase the prices in line with the global prices.

Any increase in prices by Lanka IOC PLC will make the firm lose business as all motorists will queue up at Ceylon Petroleum Corporation’s filling stations, which sell fuel at subsidised prices. And the resulting losses are financed by the taxpayers’ money or a short-term overdraft from a state bank, which ultimately results in money printing.

The International Monetary Fund (IMF) recently renewed its call for a fuel pricing formula and the government is expected to come up with it this March, after the election season. Meanwhile, for the nine months ended in December 31, 2017, the company reported a net loss of Rs.652.2 million or Rs.1.22 a share from a net profit of Rs.3.72 billion or Rs.6.98 a share during the same period last year. 

Revenue for the period was Rs.67.5 billion, up from Rs.60.7 billion in the comparable period in 2016. 
The cost of sales rose by a sharp 23 percent YoY to Rs.65.8 billion. 

The gross profit shrank to just Rs.1.75 billion from Rs.7.1 billion a year earlier.

Indian Oil Corporation Limited held a 75.12 percent stake in Lanka IOC PLC as of December 31, 2017.