OMCs to register weak Q2 on fall in marketing margins
State-run oil marketing companies (OMCs) – IOC, BPCL and HPCL– are seen to have posted weaker earnings in the second quarter of the current financial year, due to a sharp fall in the marketing margins of petrol and diesel, after the rise in benchmark crude oil prices. However, analysts believe that a sequential improvement in the refining margins can provide some cushion for these downstream oil companies in the July-September quarter.
Although the OMCs may still have partly recouped the losses reported in the last financial year in the first half of FY24, the prospects are not bright for the second half of the current year.
The latter half of the second quarter saw a great volatility in the oil market owing to the production cuts by Saudi Arabia and Russia, in addition to those already in place by the Organization of Petroleum Exporting Countries. Crude prices, as a result, touched their highest level of $97/bbl since November 2022. Added to the concern was the outbreak of Israel-Hamas war.
Elara Securities, however, see a rise in the average crude inventory to $5.8/bbl in Q2FY24 compared to nil in Q2FY23.
OMCs diesel retail gross margin should post Rs 15.6/litre YoY gain but fall Rs 7.6/liter QoQ to Rs 2.1/litre,” Elara Securities said. It also expects gasoline margin to fall Rs 2.8/litre on quarter to Rs 7.9/liter but increase Rs 7.3/liter on a yearly basis.
Even though brokerage firms expects refining margins of the OMCs to go up, they remain cautious on the retail pricing of petrol and diesel which will primarily determine the earnings of these companies in the quarter that just ended.
Analysts at Prabhudas Lilladher expects that recovery in refining margins will take Q2 PAT (Profit After Tax) of the downstream companies to Rs 19,700 crore, 25.2% down from Rs 30,500 crore in Q1FY24.
The brokerage firm also sees OMCs EBITDA declining to Rs 34,000 crore, down 28.3% from the previous quarter. The adjusted PAT is seen declining 35.3% to Rs 197 billion.
Nuvama Institutional Equities foresees a decline of 51.8% in the EBITDA of OMCs from Q1FY24. The average refinery utilization of OMCs is estimated at 107.1% compared with 110.6 in the first quarter. The refinery utilization is however estimated up from 97.3% in Q2FY23.
However, even on the rise in Brent crude prices, the reported GRMs (gross refining margins) of OMCs is likely to rise sharply by $14-19 per barrel in the September quarter”, according to the brokerage.
Analysts at Motilal Oswal expects blended marketing margins for OMCs at Rs 5/5.4/5.1 per liter in Q2FY24 due to an increase in the Brent crude prices and stable retail fuel prices during the period.
The brokerage firm has further estimated Brent prices by Q4FY24 to be at $90/bbl and to remain at this level throughout FY25 as the International Energy Agency expects oil markets to tighten in the second half of the calendar year 2023. If crude prices surge even beyond, OMCs may find themselves in a more upsetting situation.
Over the past two quarters, OMCs have been posting profits until late September when crude prices rose significantly and these companies had to suffer under-recoveries to the tune of Rs 7/litre on sale of petrol and diesel.
gIOC (Indian Oil Corporation Ltd) is likely to report weak operating profit due to decline in marketing margins (Rs 4.4/ltr vs Rs 8.7/ltr in Q1),” Prabhudas Lilladher said in its preview. The firm also expects the company’s gross refining margin to be at $12.4/bbl.
While analysts see earnings of the OMCs taking a hit in Q2FY24, upstream companies, on the other hand, might seem to have benefited from high crude oil prices realizations due to lagged impact of windfall tax and also QoQ higher product sales.
Upstream companies ONGC and OIL are, however, likely to improve their Q2 PAT to Rs 12,200 crore compared with Rs 11,300 crore in Q4FY23, with steady net crude price realization post windfall taxes and capped domestic gas prices at $6.5/mmBtu, analysts at Prabhudas Lilladher noted.
Elara Securities also expect PAT for upstream companies to increase in the range of 13-22% on year. “ONGC oil & gas production fell 1% YoY but rose 1% QoQ while Oil India oil & gas production is likely to improve 1% YoY and 4% QoQ,” the firm said in its report.