Oil refiners soar as cooling oil fuels optimism on marketing margins
3 min read 16 May 2023, 10:09 PM ISTThese companies are currently recouping their losses on marketing auto fuels, gaining from a fall in global crude oil prices following last year’s rally.
PremiumNEW DELHI : Shares of Hindustan Petroleum Corporation Ltd (HPCL) and Indian Oil Corporation Ltd (IOCL) scaled new 52-week highs this week, propelled by an optimistic marketing margin outlook. Bharat Petroleum Ltd (BPCL) also scored major gains in trading.
These companies are currently recouping their losses on marketing auto fuels, gaining from a fall in global crude oil prices following last year’s rally.
Analysts at Motilal Oswal Financial Services said the drop in benchmark crude prices has boosted gross marketing margins to ₹9 and ₹11.8 per litre as of May 1st week for petrol and diesel, respectively.
Benchmark Brent crude prices surged after Russia invaded Ukraine in February 2022. Brent had even crossed $130 a barrel in June 2022, a level not seen since 2008, as the Russia-Ukraine war triggered worries on supply and energy security.
Indian oil marketing companies (OMCs), which stopped changing auto fuel prices since 6 April 2022, made an average loss of ₹ 0.68 and ₹ 10.1 per litre on petrol and diesel, respectively, till December, according to Motilal Oswal.
With Brent now retracing to around $75 a barrel, OMCs have begun to recoup their losses incurred, boosting the earnings outlook. HPCL’s fiscal fourth-quarter (Q4FY23) performance is a testament to this. The state-run refiner hit a nine-year-high quarterly standalone net profit of ₹3,223 crore in the March quarter, rising 80% from ₹1,795 crore a year earlier. HPCL’s earnings before interest, taxes, depreciation and amortization (Ebitda) of ₹ 4,660 crore, more than doubled from around ₹2,070 crore in the December quarter, and ₹ 2,170 crore a year earlier, as per analyst calculations. This was driven by stellar refining and marketing performances.
Avishek Datta, research analyst, Prabhudas Lilladher Pvt. Ltd said the improving marketing environment will further drive near-term earnings with Q1FY24 blended marketing margins expected at ₹7 per litre following a drop in international diesel prices to $90 a barrel from the recent peak of $170 per barrel. That along with range-bound oil prices due to global recessionary conditions and high interest rates, despite rebounding demand from China is positive.
Analysts believe HPCL, along with other OMCs, are well placed to gain from the improving marketing scenario and healthy refining profitability.
HPCL’s average gross refining margin at $14.01 per barrel in Q4 rose $4.9 a barrel sequentially and $1.6 a barrel from a year earlier. This was a key factor in HPCL’s outperformance.
Meanwhile, IOCL also reported its first net profit growth in five quarters with Q4 standalone profit rising 67% from a year earlier, which analysts attributed to lower oil prices. IOCL’s refining margin at $15.2 a barrel came better than $12.9 in Q3, as per Datta.
While the refining performances were strong in Q4, refining margins faced some volatility during April and May. The benchmark Singapore gross refining margin dipped to $3.3 a barrel at the start of May from an average of $8.2 a barrel in the previous quarter.
Refining performance may thus see some impact in the current quarter though analysts expect benchmark GRMs to improve with recovery in global demand.
Nevertheless, current super-normal marketing margins are likely to support the performance of OMCs. To be sure, OMCs are being asked to start reducing auto fuel prices ahead of key state elections. “We see a possibility of price cut in diesel/gasoline before key state elections in December," said analyst at Jefferies India Pvt Ltd in their report on HPCL.
However, the government had made capital allocation of ₹30,000 crore for OMCs in the Union budget to be spent on making low-carbon infrastructure, which analysts said was to compensate OMCs for selling fuel at a loss. The receipt of this ₹30,000 crore capital subsidy by the OMCs could, however, provide an upside trigger, said analysts.
