Instability in cash flows have emanated from volatile crack margins and US$-INR rates.
Volatile crack margins have seen quarterly GRMs of major refiners vary between negative US$ 5/bbl and positive US$ 10/bbl.
Instable cash flows have led to liquidation of oil bonds, in many cases, at a steep discount to face value. Instable cash flows have also led to sporadic periods of enhanced working facility utilization by refiners.
De-regulation in petrol pricing and anticipated de-regulation in diesel pricing is likely to further enhance margin volatility as under-recoveries due to genuine contraction in crack margins are not met through oil bonds.
While managing cash flow stability may lead to giving up potential upside in crack margins and INR depreciation, lack of cash flow stability may put pressure on debt servicing and investment obligations.
To sustain a stable cash flow model in the longer run, locking in INR value of refining margins is critical.
While locking in the entire projected margins may lead to giving up a potential upside, locking in margins within the defined risk appetite is likely to give cash flow stability to the business.
Use of value at risk-based hedging models with a view to contain risk with the risk appetite and dynamically balance the hedging portfolio can help balance the risk-return profile.
1Source: Annual report of refiners.
*Refer to the attached PDF for source information