The nascent rally in energy stocks have faded in recent past as continued slide in international crude prices and the lack of any increase in petrol and diesel prices dragged down oil marketing companies (OMCs). Energy companies including Oil and Natural Gas Corporation (ONGC), Reliance Industries, Oil India, BPCL, HPCL, Adani Total Gas are reeling under selling pressure these days as global benchmark Brent crude has witnessed significant fall recently amid growing fear that the global recession and fresh Covid-19 outbreak in China would impact demand for fuel.
According to ICICI Securities report, a sharp drop in crude price and pricing decisions for petrol and diesel pose key upside risks for OMCs. Fuel prices have been kept unchanged for one month since May 21, after the government announced a cut in excise duty on petrol by ₹8 per litre, and by ₹6 per litre on diesel to ease inflationary pressure.
However, the oil prices in the international market continued to fluctuate, hitting a high of $125 a barrel in intraday trade on June 14 to $108.05 per barrel during the session today. On Thursday, the Brent oil for August delivery was trading 2% lower at $109.5 per barrel, while the U.S. West Texas Intermediate (WTI) crude August futures were quoting at $103.8 a barrel, down 2.3%. In the previous session, Brent and WTI fell over 4% amid persistent fear that aggressive rate hikes by the U.S. Federal Reserve and other central banks would push the global economy into recession.
The marketing segment for OMCs is continuously incurring losses, owing to strong international petrol and diesel prices and the lack of any price increase seen in either fuel in more than a month, says the report. However, this has been offset by a very strong refining margin environment, with calculated margins for OMCs trending at around $18-20 per bbl over the recent weeks. It is further boosted from the reported 20% crude sourcing from Russia at 20-25 per bbl discount to benchmark crude.
The report noted that despite the strength seen in refining, overall earnings for OMCs will continue to remain under pressure, given the steady expansion in marketing losses over the last 3 months. “With international prices expanding sharply over the last 2-3 months and the continuing freeze on price increases in retail fuels, estimated losses on petrol and diesel have escalated to ₹10.5/ltr and ₹12.5/ltr for Q1FY23 (till week of 17th June 2022) vs loss of ₹1.5/ltr and ₹1.6/ltr, respectively, for Q4FY22,” it added.
“However, factoring a record $20-22/bbl Gross refining margin (GRM) for the entire FY23E also cannot offset more than ₹3-4/ltr of net retail loss on petrol/diesel. We see a sharply lower EPS trajectory for FY24E as well if we factor lower marketing earnings trajectory to continue for longer-than-earlier estimates, owing to the Russia-Ukraine conflict,” it added.
The brokerage has also cut earnings for FY23-24E by 15-60% to factor higher marketing losses, offset by sharply higher GRM estimates. The agency has downgraded state-owned oil retailer Hindustan Petroleum Corporation Ltd (HPCL) to “REDUCE” from “ADD”, Bharat Petroleum Corporation Ltd (BPCL) to “ADD” (from “BUY”). The agency has retained “BUY” call on Indian Oil Corporation Ltd (IOCL).
“For BPCL & HPCL, a sharp turnaround in pricing decisions for petrol and diesel and a sharp drop in crude price are key upside risks. A sharp fall in refining and even higher marketing loss are key downside risks for IOCL,” the report noted.
On Thursday, the S&P BSE energy index extended losses and declined 1.3%, led by Mangalore Refinery & Petrochemicals (MRPL) and Chennai Petroleum Corporation Limited (CPCL), which fell around 6%. Index heavyweights Oil and Natural Gas Corporation (ONGC), Reliance Industries and Adani Total Gas fell up to 1.5%.
