In the third quarter of the fiscal year 2024, state-owned oil marketing companies (OMCs) such as IOC, BPCL, and HPCL are expected to witness a significant decline in operating profits, following a robust first half. Analysts attribute this anticipated downturn to inventory losses and lower gross refining margins.
According to Emkay Global, the diesel marketing margins for OMCs plummeted to a negative Rs 0.5 per litre, while petrol margins experienced a 20% improvement, reaching Rs 6.8 per litre in Q3FY24. The decline in operating profits can be attributed to Brent crude averaging around $84 per barrel in Q3FY24, marking a 3% decrease from the previous quarter. The closing value of Brent at $78/bbl resulted in refining inventory losses ranging from $2.5 to $3 per barrel for OMCs.
Additionally, the gross refining margins of the three OMCs fell from $9-10 per barrel to $5-6 per barrel in Q3FY24 due to a correction in distillate spreads. Emkay Global predicts a substantial decline of 70-80% in EBITDA on a quarterly basis, with estimated PAT (profit after tax) for IOCL at Rs 2600 crore, and BPCL and HPCL at Rs 6,000 crore and Rs 2,000 crore, respectively.
Kotak Institutional Equities also anticipates a sharp decline of 54-65% in EBITDA for the three OMCs during the same period. Despite this, ICICI Securities notes that due to the softness in crude prices and capped retail auto fuel prices, the marketing earnings of OMCs are expected to remain strong.
Analysts at Prabhudas Lilladher highlight that marketing margins on petrol and diesel have stayed robust, with a gross marketing margin of Rs 9.1 per litre and Rs 1.2 per litre on petrol and diesel, respectively, despite a decline in benchmark prices.
The first two quarters of the financial year have seen healthy profits for the three OMCs compared to the same period in the previous fiscal year, primarily attributed to improved marketing margins. In the quarter ending September, the consolidated net profit for the three OMCs amounted to Rs 27,783.59 crore, a significant turnaround from a cumulative loss of Rs 3,724.39 crore in the corresponding period the previous year.
However, for upstream companies, analysts expect operating profitability to remain flat with muted volume growth and unchanged realizations. Kotak Institutional Equities predicts that EBITDA will remain flat for both ONGC and Oil India, citing a windfall tax on oil and a ceiling price on APM gas as factors restricting upstream realizations.
The firm further anticipates crude oil production and sales by the two companies to be largely flat, with a modest 5% increase in Oil India’s gas volume. Despite this, ICICI Securities projects a slight improvement of 2% on a quarterly basis in the EBITDA of upstream companies, attributing it to enhanced oil and gas production and lower operational expenditure.
In conclusion, the third quarter of the fiscal year 2024 is expected to pose challenges for state-owned oil marketing companies, primarily due to inventory losses and reduced refining margins. Despite this, the marketing earnings of OMCs are anticipated to remain strong, and upstream companies may experience a modest improvement in profitability. The dynamics of the oil and gas sector continue to be influenced by global crude prices, refining margins, and other external factors.
As the oil marketing companies navigate challenges in Q3FY24, the intricacies of global crude prices and refining margins persist as key determinants. The anticipated decline in operating profits, driven by inventory losses and refining margin contractions, underscores the industry’s sensitivity to market fluctuations. However, the resilience of marketing earnings, coupled with improved profitability in upstream companies, paints a nuanced picture of the sector’s dynamics. Analysts emphasize the impact of factors like distillate spreads, muted volume growth, and regulatory constraints on oil and gas realization. The intricate balance of these elements continues to shape the financial landscape for both OMCs and upstream entities.