IOC, HPCL to BPCL: OMC stocks fall up to 7% as crude oil price spikes to $114 on flare-up in US-Iran war

The crude oil price rise is creating havoc for Indian oil marketing companies (OMCs), whose shares tumbled up to 7% in intraday deals on Thursday, March 19, taking the month-to-date fall to nearly 25%.

The Brent crude futures surged over 3% to top $114 per barrel after the flare-up in the war in the Middle East, involving attacks on Middle East energy facilities. Iran attacked energy facilities across the Middle East following Israel's strike on its South Pars gas field, a major escalation in the war.

Following this development, OMC stocks — Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Limited (HPCL) and Bharat Petroleum Corporation Limited (BPCL) — lost 4-7%.

HPCL share price declined the most as it shed 6.7% to ₹325.70, followed by BPCL and IOCL, which declined 5.13% and 3.70%, respectively. So far in March, IOCL has lost 23%, and the other two have beenover 25% spooked by the concerns around the impact of rising crude oil prices on their margins and bottomline.

Every $1/bbl rise in oil price above ~$70/bbl hits OMCs’ auto-fuel GMM by ₹0.55/ltr and consolidated EBITDA by 7–9%, JM Financial has estimated in a report earlier this month.

The latest development regarding the attack on energy facilities has exacerbated concerns as the supply disruptions persist for nearly three weeks now after the closure of the Strait of Hormuz, a critical chokepoint in the Middle East which accounts for 20% of the total crude oil passage.

Analysts at Kotak Institutional Equities (KIE) believe that even if there is a resolution to the impasse soon, the recovery will likely be slow and may not be complete due to large-scale infrastructure damage, keeping the crude oil prices elevated. Against this backdrop, it raised the FY2027 oil price assumption to$85/barrel and FY2028 to US$75/barrel from $65/barrel and $75/barrel earlier, respectively.

Impact of higher crude oil prices on OMCs

Given a lack of retail pricing freedom, OMCs will have to absorb higher crude prices. KIE further said that OMCs’ costs will rise due to elevated crude premiums, higher freight expenses and a weak rupee.

"Paradoxically, the high product cracks can hurt amid frozen retail prices. Emergency LPG imports will be expensive. The compensation from the government takes time and is usually partial. The negative public sentiment amid LPG shortages makes near-term petrol/diesel price hikes very difficult. Since retail prices were not cut at lower oil prices, OMCs have benefited in the last few years. Now, amid higher oil prices, this cushion built over the years can vanish quickly," it added.

Against this backdrop, the brokerage has reduced the FY2027E EBITDA by 45-47% for BPCL and HPCL and 28% for IOCL. It also slashed the FY2028E EBITDA by 3-8%. It also cautioned that it is likely that firming up crude oil prices could push OMCs into losses.

With no retail pricing freedom, OMCs will have to absorb higher crude and freight/insurance costs. The negative public sentiment amid LPG shortages makes large petrol/diesel price hikes very difficult. OMCs have benefited from elevated marketing margins in the past few years. However, weak earnings are now set to erode the buffer created.

Apart from higher crude benchmarks, OMCs’ costs will rise due to elevated crude premiums, higher freight expenses and a weak rupee. Paradoxically, the high product cracks can hurt amid frozen retail prices. Emergency LPG imports will be expensive. The compensation from the government takes time and is usually partial. The negative public sentiment amid LPG shortages makes near-term petrol/diesel price hikes very difficult. Since retail prices were not cut at lower oil prices, OMCs have benefited in the last few years. Now, amid higher oil prices, this cushion built over years can vanish quickly.

"With the low-oil-price cycle behind us, the strong earnings phase for OMCs is likely over as well. The current crisis underscores the need for higher strategic crude and LPG reserves, with OMCs likely to play a leading role," said KIE as it maintained 'SELL' rating on IOCL, BPCL and HPCL, while revising target prices lower to ₹100 ( ₹125 earlier), ₹240 ( ₹300 earlier) and ₹235 ( ₹335 earlier), respectively.

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