Nippon Oil Forecasts Wider Loss on Declining Crude

By Megumi Yamanaka

Jan. 30 (Bloomberg) -- Nippon Oil Corp., which will merge with Nippon Mining Holdings Inc. in October, forecast a wider loss as the plunge in the price of crude cut the value of stockpiles held by Japan’s biggest refiner.

The company estimated a net loss of 240 billion yen ($2.7 billion) for the year ending March 31, compared with the 23 billion yen it predicted in October, it said in a statement to the Tokyo Stock Exchange today. It reversed its pretax estimate to a 270 billion yen loss from the previous forecast of 5 billion yen profit.

Oil prices have fallen 72 percent from a record $147.27 a barrel in July, reducing the value of crude inventories, while the yen’s 20 percent rise in a year has trimmed gains from output at fields Nippon Oil owns in the U.S., Middle East and Asia. Declining petroleum demand in Japan has forced the company to cut production for a ninth consecutive month in February and agree to merge with Nippon Mining to reduce capacity and costs.

“Drops in oil and recent gains in the yen against the U.S. dollar weighed on the company’s upstream business,” Hidetoshi Shioda, a senior analyst at Mizuho Securities Co., said by phone before the earnings announcement. Shioda estimated Nippon Oil’s inventory-valuation loss would widen to about 350 billion yen from the 163 billion yen the Tokyo-based company forecast in October.

Shares Decline

The shares have slumped 45 percent in the past 12 months, outpacing the 40 percent decline in the benchmark TOPIX index. They fell 3.2 percent to 396 yen at 2:38 p.m. in Tokyo trading.

Nippon Oil along with Japanese refiners Showa Shell Sekiyu K.K. and Cosmo Oil Co. are incurring valuation losses because of the way they keep accounts, which tends to exacerbate losses when oil prices are falling. Nippon Oil calculates the cost of buying oil based on higher, older prices and evaluates its stockpiles based on current, lower prices.

Nippon Oil today cut its forecast for crude oil prices to an average of $83.70 a barrel from the $97.80 a barrel it predicted in October. It raised its estimate of the exchange rate against the U.S. dollar to 100 yen from the 105.3 yen it predicted in October.

For the nine months ended Dec. 31, the company posted a net loss of 224.5 billion yen from a 136 billion yen profit a year earlier, Nippon Oil said in a separate statement today.

Drops in Demand

Japanese refiners face a shrinking market because of the ageing population and a switch to alternatives fuels. Domestic sales dropped 9.5 percent in November, and consumption slumped by more than 10 percent each month from August to October.

Nippon Oil is reducing capacity and restructuring to cope with weak demand. The company, which absorbed Kyushu Oil Corp. last year, is set to merge with Nippon Mining in October. President Shinji Nishio pledged to cut capacity by more than 400,000 barrels a day, or 24 percent, as part of the merger. It will also close the 60,000 barrel-a-day Toyama refinery in central Japan on Feb. 1, ahead of schedule.

“By reducing output refiners have succeeded in improving their margins for processing fuels,” Shioda said. “Investors are looking to see what benefits the merger will bring.”

To contact the reporter on this story: Megumi Yamanaka in Tokyo at myamanaka@bloomberg.net.