The rising global uncertainty and declining trend in refining margins have forced the three state-owned oil marketing companies to a weaker start to the current financial year 2024-25. With peak earnings of FY24 fading away, the three OMCs are now likely to report lower gross refining margins in the third quarter of the current fiscal too, taking a hit on their profitability, as per analysts. On a sequential basis, the downstream companies may see some improvement.
In the second quarter of FY25, the three oil marketing companies – Indian Oil Corp, Bharat Petroleum Corp, and Hindustan Petroleum Corp reported weak earnings owing to lower gross refining margins and under recoveries made on LPG.
“BPCL’s and HPCL’s reported Q2FY25 financial performance was significantly below our expectations, mainly due to a weaker refining margin. LPG under recoveries have largely remained in line with the Q1FY25 trend,” said Motilal Oswal in its report. “Overall, the gross refining margins remain muted in October 2024, along with the oil demand outlook.”
The firm highlighted that Singapore gross refining margin has been averaging $3 per barrel in October 2024 against $3.6 per barrel in the second quarter of FY25, implying that refining might remain under pressure in the third quarter as well.
IOCL reported a chemical EBIT (earnings before interest and taxes) loss of Rs 91.6 crore as weak margins offset the 3% QoQ volume rise, Nuvama Institutional Equities said. “Valuations remain expensive (close to long-term average), baking in strong earnings growth of the past few quarters,” it said, adding that further deterioration (in earnings) is underway.
While refining margins have taken a hit due to volatility in the crude oil prices, the three OMCs continue to generate strong marketing margins on petrol and diesel currently, as per analysts. Despite a dismal Q2FY25 earnings performance, analysts at Motilal Oswal believe Q3FY25 profitability to improve further on a sequential basis on the back of strong marketing margins.
The OMCs made under recoveries on LPG in both the first quarters of the present fiscal. However, LPG being a controlled product, analysts remain hopeful of financial support to OMCs from the government.
Motilal Oswal has cut its FY25 EBITDA and net profit estimates by 27% and 49% respectively for HPCL owing to weak refining performance. “We also reduce our FY25 and FY26 GRM estimate to $4.6 per barrel and $6.1 respectively,” it said. HPCL took a hit of Rs 2,060 crore due to LPG under-recoveries in the quarter under review.
IOCL’s GRM fell off 91% on-year and 75% sequentially to $1.6 per barrel, lowest among its peers BPCL and HPCL in the Jul-Sep quarter.
In the near to short term, analysts also see crude oil prices to continue experiencing volatility which may come against the prospect of the OMCs.
“In the short term, oil prices may continue to experience volatility. Market sentiment is likely to remain cautious, especially with Israel’s potential retaliation options still unclear and global geopolitical tensions on the rise,” said Narinder Wadhwa, Managing Director of SKI Capital.
Long-term crude outlook, however, may remain bullish due to the low global inventory levels and the possibility of renewed geopolitical pressures. “Should these tensions escalate, crude could see upward pressure despite demand concerns from economic slowdowns in major markets like China,” he said.
Even as robust marketing margins might be able to support growth of the three OMCs, any additional profitability for them will depend upon cheaper crude sourcing, higher share of value added products in the product slate, and better spreads of non-auto fuel products and volume growth, as per analysts.
From: financialexpress
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