Brent below $80 to sustain OMC earnings recovery

Synopsis

Oil marketing companies' margins are expected to remain stable as crude prices stay below $80. Recent crude price drops have significantly improved earnings for state-owned oil companies. These companies incurred substantial under-recoveries on fuel sales earlier this year. Current integrated margins are more than double historical averages, boosting annual earnings. Analysts suggest under-recoveries could be recovered within twelve months if conditions persist.

ET Intelligence Group: The price of Brent crude has rebounded to around $78 per barrel over the past week from $72 amid renewed concerns over the Iran conflict. Analysts, however, believe that marketing margins of oil marketing companies (OMC) may not show much of an impact as long as crude price stays below $80 per barrel.

The sharp fall in crude price from the April peak has improved the earnings outlook for state-owned OMCs, with doubling of per-litre operating earnings and integrated margins from historical averages. The caveat is that any increase in excise duty may offset part of the benefit while a cut in retail fuel prices would reduce marketing margins.

"OMCs will be hurt if retail fuel prices are cut. Otherwise, the earlier price increase should largely insulate marketing margins at $75-80 per barrel," Maulik Patel, head of equity research, Equirus Securities told ET. Brent crude prices have plunged by 35% from $120 in April. OMCs have incurred under-recoveries to the tune of ₹2.2 lakh crore on the sale of petrol, diesel and liquefied petroleum gas (LPG) as of June 30, according to the petroleum and natural gas ministry.

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But any excise duty hike or a cut in retail fuel prices can erode gains; Under-recoveries at ₹2.2 lakh cr as of June 30

An under-recovery is the loss an oil company incurs when it sells fuel for less than what it costs to buy the crude, refine it and deliver the products.

At Brent crude prices below $75 and prevailing refining cracks of about $23 a barrel for petrol and $44 a barrel for diesel, integrated margins are estimated at around ₹26 per litre for petrol and ₹27 per litre for diesel, according to Equirus Securities. These margins are more than double the normalised level of ₹11-12 per litre.

"Current integrated earnings are estimated at around ₹4 lakh crore annually at this run-rate, compared with normalised earnings of ₹1.8 lakh crore, implying incremental integrated earnings of slightly more than ₹2 lakh crore per year," said Patel. He estimates that OMCs could recover under-recoveries in nearly 12 months if crude prices and refining margins are sustained.

According to JM Financial, operating profit before depreciation and amortisation (Ebitda) of OMCs from petrol and diesel sales has risen to around ₹19 per litre compared with a historical average of about ₹8 per litre.

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