Oil marketing companies (OMCs) might see a huge fall in marketing margins in the second quarter of FY24, with a late surge in crude oil prices amidst static retail fuel selling prices.
Through the quarter Brent crude’s average price was $87/bbl, up 11 percent quarter-on-quarter. The benchmark closed the quarter at $21/bbl higher at $96/bbl. On October 12, the benchmark crude settled at $86bbl.
This could hit Q2FY24 net profits of OMCs like Indian Oil, BPCL and HPCL, said analysts.
However, strong refining margins and inventory gains could partly offset the slump in marketing margins of downstream oil companies, like the ones above.
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Downstream companies are those involved in the post-production of crude oil and natural gas.
Emkay Global predicts that the second-quarter net profit of OMCs may fall as much as 20-50 percent quarter on quarter (QoQ). This is due to the significant drop in diesel and petrol margins as a result of the rise in crude oil price and product cracks.
Kotak Institutional Equities said, “We expect a sharp QoQ decline (off a bumper Q1FY24 base) in EBITDA (earnings before interest, tax, depreciation and amortisation) for OMCs as marketing margins on petrol/diesel declined sharply. However, we expect sequential improvement in refining margins and likely high adventitious gains to provide some cushion in Q2FY24.”
Gross refining margins improve in Q2
The benchmark Gross Refining Margins (GRMs) likely rebounded to $9-10/bbl for the quarter, driven by the spike in diesel-kero spreads and a modest rise in petrol. Nuvama predicts a 36 percent YoY and 2.3x QoQ increase in Singapore GRMs, influenced by elevated global product cracks.
“We build in GRMs of $4/9/12 per bbl for BPCL/HPCL/IOCL, respectively. We expect refinery utilisation to remain well above nameplate capacity. Retail margins have improved sharply YoY,” added Nuvama.
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“We expect IOCL to record flat EBITDA QoQ, while BPCL and HPCL are likely to see a 15-20 percent decline due to shutdowns and pre-commissioning,” said Emkay. It estimates Q2 FY24 PAT for Indian Oil at Rs 11,300 crore, for BPCL at Rs 7,400 crore, and for HPCL at Rs 3,100 crore.
Late surge in crude oil price helps OMCs reap inventory gains
In Q2, Brent crude had witnessed an 11 percent surge on a sequential basis, averaging at $87/bbl in Q2FY24, leading to substantial refining inventory gains for OMCs.
It closed higher at $96/bbl, resulting in sizable refining inventory gains of $3-6/bbl for OMCs. Inventory gains are the positive difference that OMCs receive from an upward change in end-product prices that are already held in stock.
However, the shrinking Russian crude discounts and a rise in Middle East official selling prices (OSPs) were viewed as future concerns.
Gas companies
Gas marketing margins are expected to be flat QoQ, while petchem losses are expected to sustain amidst muted realisations and ~82 percent plant utilisation levels, according to analysts.
“LPG earnings are likely to be weak as Aramco’s LPG original selling prices have dropped by ~28 percent QoQ,” said Emkay.
For GAIL, Emkay predicted the standalone PAT would come in at Rs 1,780 crore, higher by 15 percent YoY. Additionally, Nuvama expected GAIL's EBITDA to increase 27 percent YoY, attributable to an increase in the transmission segment led by higher volumes and tariffs.
Reliance Industries
Reliance Industries Ltd (RIL) has showcased noteworthy resilience and growth during Q2FY24, said analysts. Nuvama expected a 26 percent YoY gain in RIL’s EBITDA on account of the strong performance across all verticals.
“We expect RIL Oil and Natural Gas' EBITDA to rise ~45 percent YoY on higher deepwater gas prices. We expect Oil-to-Chemicals EBITDA to rise 30 percent YoY on strong refining, offset by the subdued petchem segment. Retail EBITDA is likely to remain strong on higher footfalls. Jio's EBITDA is likely to surge 18 percent YoY on a high subscriber base. ARPU shall likely remain flat at Rs 173,” added the brokerage.
Kotak Securities agreed: “We expect consolidated EBITDA to improve by 6 percent QoQ on better standalone performance and steady growth in digital services and organised retail.”
Emkay believed that overall, in the O&G sector, a strong show is expected from RIL, while other companies should report decent numbers.
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