Street still cautious on IOC, HPCL and BPCL amid lower crude oil prices

While lower crude oil prices are good for margins, lesser profitability on refining, policy uncertainty add to concerns

Brent crude oil prices have corrected by about 30 per cent from their peaks in early October. This, coupled with strong fuel demand in the country, remains favourable for profitability of oil marketing companies (OMCs). Demand growth of refined products had improved to 4 per cent year-on-year in October after two successive months of muted growth. A similar trend is expected in November.

However, analysts are cautious on IOC, HPCL, and BPCL on muted refining margins as well as uncertainty around government policies, which are expected to weigh on stock prices.

The Singapore benchmark gross refining margin has now declined more than $2 a barrel in the past five quarters. It stands at a multi-quarter low of close to $5 a barrel, in the current quarter till date. Weak gasoline and naphtha spreads have largely driven the decline. The falling crude oil prices may also mean OMCs will see inventory losses, given they will be carrying high cost inventory. Inventory losses will further impact soft refining margins as the volatility in currency may lead to forex losses during the current quarter, say analysts.

While crude oil prices have corrected, all eyes will be on the OPEC meeting scheduled for early December. Any cut in production could lead to strengthening of crude oil prices, which would be a negative for OMCs.

The Street sentiment is low on account of the busy election season ahead. Some time back, in a rising oil price scenario, the government had forced OMCs to cut prices by about Rs 1 per litre in marketing margins. Even during state elections about a year ago, OMCs were not able to hike prices in tandem with rising crude prices.

Analysts at IIFL say earnings predictability worsens for OMCs when prices are volatile. Some analysts also feel that a sharp crude oil price fall could also lead to hike in excise duty. Though retail price cuts have been slower — which should boost marketing margins — investor concerns, analysts say, are around policy uncertainty and limited visibility on LPG subsidy.