Crude price crash a mixed bag for Indian oil firms; RIL and ONGC lose

Saudi Arabian Oil Co., or Saudi Aramco, has slashed its crude pricing for Asia region by $4-6 per barrel for April in an effort to push more of its produce into the market. For Indian state-owned refiners, such as Hindustan Petroleum Corp. Ltd (HPCL) and Bharat Petroleum Corp. Ltd (BPCL), this is a boon, as lower procurement costs will boost refining margins.

Of course, the gains will be offset by inventory losses, and the general softness in demand will restrict gains. Nevertheless, HPCL and BPCL shares were up 5-6%, indicating that analysts expected net benefits from the drop in oil prices.

Analysts at Kotak Institutional Equities expect BPCL, HPCL and Indian Oil Corp. Ltd (IOC) to benefit from lower crude oil prices in multiple ways—(1) improvement in marketing margins, (2) reduction in “fuel and loss”, (3) increase in crude discounts from the Middle East region and (4) lower working capital. Fuel and loss refers to the cost that refineries incur due to the fuel consumed to run their operations and the fuel lost in the system while processing crude oil into petroleum products.

Brent crude oil prices declined as much as 30% in early morning deals on Monday, one of the sharpest one-day fall in history.

Shares of oil producers Oil and Natural Gas Corp. Ltd (ONGC) dropped as much as 16% to ₹74.55 per share. Lower crude oil prices pose a direct risk to earnings of these companies, notwithstanding attractive valuations.

The sharp fall in crude oil prices has repercussions for Reliance Industries Ltd (RIL) as well.

The Saudi stock market sank more than 8% on Sunday with shares of Saudi Aramco slipping below their initial public offering price. With these events unfolding, some analysts anticipated delays in RIL’s debt reduction plan timelines. RIL plans to become a zero-net-debt company by 31 March 2021, and the 20% stake sale of its refining and petrochemicals segment to Aramco is crucial for the former to achieve the debt target. The RIL stock dropped by nearly 12% on Monday on NSE, as it also faced some of the brunt of the panic-selling in the markets. Since the refining business now accounts for only 20% of RIL’s enterprise value, the drop in crude oil prices is not expected to have a major impact on its valuations, apart from the concern about the Aramco deal.

Analysts estimate further downsides to oil prices. Some say the failure of a deal between the Organization of the Petroleum Exporting Countries and its allies essentially means there is no floor on prices, as there is now no restriction on how much each member produces.

Note that these events come at a time when demand outlook has been weak, especially with Covid-19 concerns looming large.