Fitch: Indian OMCs, GAIL may face cash-flow pressure amid Iran tensions and oil price rise

Indian oil marketing companies (OMCs) and state-run GAIL (India) could face cash flow issues if supply disruptions continue amid the war in West Asia, elevated oil prices, and closure of the strategic Strait of Hormuz, according to Fitch Ratings.

However, while near-term credit of Bharat Petroleum Corporation (BPCL), Hindustan Petroleum Corporation (HPCL), and Indian Oil Corporation (IOC) may weaken, their ratings remain unchanged due to strong government support, it added, as per a PTI report.

What's the status of Indian OMCs?

Among rated OMCs, BPCL currently has the strongest balance-sheet buffers to withstand a prolonged supply disruption or higher feedstock costs, followed by IOC and HPCL, the Fitch note added.

The Centre is likely to balance OMCs' financial health with efforts to manage inflation and fiscal policy, as seen in past periods of crude price volatility, it added.

“We expect GAIL's leverage to rise from a Middle East liquified natural gas (LNG) disruption, but it is less exposed to a prolonged supply shock and price escalation than rated OMCs due to lower dependence on imported feedstock and higher balance-sheet headroom,” Fitch stated.

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India imports nearly half of its natural gas requirements, with the Middle East accounting for about 60% of LNG supplies, leaving GAIL's transmission and marketing businesses vulnerable to supply disruptions.

If Middle East LNG is unavailable for one quarter, Fitch estimates GAIL's EBITDA net leverage could rise to about 2.5x in the financial year ending March 2027, compared with an earlier estimate of 1.8x.

A two-quarter disruption could push leverage closer to 3.0x due to weaker petrochemical earnings, lower LNG marketing and transmission volumes, and higher working capital needs. The company could mitigate the impact by cutting LNG use in petrochemicals, sourcing spot cargoes and slowing capital expenditure.

For rated OMCs, Fitch estimates EBITDA net leverage could rise by about 0.4x-0.6x in FY27 under a scenario where Iran-related disruption lifts Brent crude to around USD 90 per barrel for a quarter, refining margins double and marketing profits fall to zero.

The companies are expected to manage short-term volatility using balance-sheet capacity, although prolonged pressure could weigh on cash generation and narrow credit buffers.

Standalone refiners such as Reliance Industries (RIL) could see mixed effects from higher crude prices, benefiting initially from inventory gains and stronger product cracks, but facing potential crude shortages and refinery run cuts if supply constraints persist, Fitch added.

Reliance Industries on Tuesday said that it is taking steps to amplify the production of LPG as per the central government's guidelines at its refining facilities at Jamnagar in Gujarat, which is the largest oil refinery hub in the world.

What steps has the government taken?

Notably, amid the rising fuel-induced woes due to the conflict in the Middle East between US-Israel and Iran, India has invoked the Essential Commodities Act to ensure the supply of domestic cooking gas remains steady.

"In light of current geopolitical disruptions affecting global fuel supply, steps have been taken to enhance LPG production and prioritise its availability for domestic consumers and essential non-domestic sectors such as hospitals and educational institutions.," the Ministry of Petroleum and Natural Gas said in a post on X.

(With inputs from PTI)