Smart sourcing spin brings 2.6 times jump in Hindustan Petroleum’s July-September quarter profit

The 2.6 times jump in Hindustan Petroleum’s ( HPCL) profit for the July-September 2014 quarter has baffled investors and analysts alike even as peers put up a rather muted show. BPCL’s net profit dropped over 50 per cent while IndianOil’s bottom line slumped into the red zone. This was on expected lines in view of the drop in prices of crude oil and petroleum products, resulting in inventory losses for these oil majors.

Since inventory is valued at cost or net realisable value, whichever is less, a drop in global oil price from $110 per barrel in June 2014 to $85 by September-end 2014 resulted in a decline in inventory value for these companies.

The secret lies in a new practice HPCL introduced while buying crude oil from overseas suppliers. During the July–September 2014 quarter, the company took advantage of the fact that it was all a buyer’s market and asked suppliers to price the crude oil cargo at a price at a specific date a month later against the prevalent practice of using the price on the date of loading. So, for the crude purchased in July, the price of August would become applicable, and so on. “This was an indirect way of hedging, which was implemented selectively during the quarter,” said KV Rao, HPCL’s finance director. With crude prices falling steadily through the quarter, this strategy helped the company limit its losses on oil inventories.

On the other hand, in its marketing division, it made gains on the inventory of refi ned products as the market price of diesel at September end 2014 remained higher than the cost. Part of HPCL’s inventory gains were also due to the difference in inventory valuation methodology. The best part is that the flexibility to shift back to the earlier pricing mechanism stays with HPCL in case oil prices start rising again.