Iran conflict may pressure cash flows of OMCs, GAIL: Fitch Ratings

Fitch says Indian oil marketing companies and GAIL could face cash flow pressure if disruptions linked to the Iran conflict persist, though government support may cushion credit profiles

Indian oil marketing companies (OMCs) and gas utility GAIL (India) Ltd are facing cash flow pressure from prolonged oil and gas supply disruption tied to the Iran conflict, Fitch Ratings said on Wednesday.

 

"An extended closure of the Strait of Hormuz or sustained high oil prices beyond a few quarters could pressure issuers’ near-term credit metrics and Standalone Credit Profiles, although ratings will remain supported by strong government linkages and state support," the ratings agency said in a note.

 

Among the OMCs, Bharat Petroleum Corporation (BPCL) currently has the most balance-sheet buffers to absorb a prolonged supply disruption and feedstock price increase, while Indian Oil Corporation (IOC) and Hindustan Petroleum Corporation (HPCL) also have adequate headroom.

   

"In the event of a prolonged disruption, we expect the government will strike a balance between maintaining adequate financial profiles at OMCs alongside its responsibilities for managing domestic inflation and fiscal policy, as demonstrated in the past, which mitigates risks," Fitch said. 

 

The agency added that it expects GAIL’s leverage to rise from a Middle East liquefied natural gas (LNG) disruption, but it is less exposed to a prolonged supply shock and price escalation than rated OMCs due to lower dependence on imported feedstock and higher balance-sheet headroom.

 

India imports nearly half its natural gas needs, with the Middle East supplying about 60 per cent of its LNG. This concentration exposes GAIL’s transmission and marketing to supply disruption.

 

"If Middle East LNG is unavailable for a full quarter, we forecast GAIL’s EBITDA net leverage to reach 2.5x in the financial year ending March 2027 (FY27), against our earlier estimate of 1.8x. Should the disruption last two quarters, leverage would be closer to 3.0x, due to weaker petrochemical earnings from high feedstock prices, lower LNG marketing and transmission volumes and potential working capital absorption," Fitch said.

 

It added the SCP headroom reflects an assumption of force majeure cover that limits customer penalties. GAIL could further mitigate the impact by cutting petrochemical LNG use, sourcing spot LNG and slowing capex. However, leverage could rise even further if customers switch away from natural gas to cheaper alternatives. 

 

Standalone refiners, such as Reliance Industries, are likely to see mixed effects from supply-driven higher crude prices, with initial support from inventory gains and wider product cracks. However, prolonged supply constraints could lead to crude shortages once inventories are depleted, possibly forcing refinery run cuts and weighing on utilisation and cash flow across the industry.