Soft crude oil prices to lower working capital requirement of OMCs

The slump in international crude oil prices is expected to prune the working capital requirement of oil marketing companies (OMCs) in line with the declining value of inventories and receivables.
 

A study by CARE Ratings forecasts that lower crude oil prices are slated to lead to lower gross under recoveries (GURs) towards liquefied petroleum gas (LPG) and superior kerosene oil (SKO) during FY21. Already, GUR has dropped significantly from Rs 9266 crore in Q1 to Rs 4582 crore at the end of Q3 in FY20.
 

The combined debt level of OMCs in the public sector stood at Rs 1.42 trillion (as on March 31, 2020), a rise of 39 per cent over the previous year. The debt burden for OMCs is expected to ease during H1 (or April-September) of this fiscal, resulting in improved liquidity position.
 

According to CARE Ratings, the impact of a fall in crude oil price owing to the coronavirus (Covid-19) pandemic on the domestic downstream sector would not be as severe as it is on the upstream sector. The profitability of OMCs will be impacted adversely by their refining business, which is expected to be offset to a certain extent through higher margins from their marketing business.
 

“We also believe that with lower working capital needs and lower GRUs, the debt levels and interest burden should come down for the OMCs thus improving the liquidity. We believe the credit profile of the OMCs to remain strong in near to medium term with higher profits, lower debt, and better liquidity profile. Additionally, given their strategic importance to domestic oil & gas policy and easy access to capital, their credit profile is expected to remain strong,” the report added.
 

A sharp fall in crude oil prices is generally not passed immediately to the customers and thus in a lower price scenario, the marketing margins tend to remain higher. CARE Ratings believes that the OMCs will witness an improvement in their marketing margin for the next couple of quarters driven by lower RTP (Refinery Transfer Price) and no major price cut in the final product pricing.
 

As there has been a significant decline in crude prices, as well as demand for petroleum products, the RTP is expected to come down, while the transportation and storage charges are expected to remain at similar levels. The improvement in the marketing margins has been marred marginally on account of the recent excise duty hike on petrol by Rs 3 per litre and Rs 1 per litre on diesel, which has been absorbed by OMCs from the cushion created out of decreased RTP.