Brent oil prices have fallen below $75 a barrel mark on oil demand concerns after the recent failure of a large US bank has raised fears of a contagion affect and a financial crisis in the US.
A fall in crude oil prices is positive for oil marketing companies (OMCs) such as IOC, HPCL and BPCL, but is negative for refiners ONGC and Oil India as their net crude realisation, after windfall tax adjustment, falls below $76-77 a barrel, said JM Financial in a note.
The brokerage said every $1 per barrel decline in net crude realisation has a negative impact of 2-3 per cent on EPS and valuation. It, however, maintained its buy ratings on ONGC and Oil India.
JM Financial said IEA has largely maintained its 2023 global oil demand estimate at 2.0mmbpd on continued expectation of a rebound in China. It still expects oil prices to be supported by lingering supply side concerns and OPEC plus' strong pricing power.
HPCL, BPCL better placed OMCS
JM Financial noted that OMCs’ blended auto-fuel gross marketing margin (GMM) has risen to Rs 10 per litre against a negative Rs 6.8 per litre in 9MFY23 and above-historical GMM of Rs 3.5 per litre. This, it said, has been driven by the fall in diesel cracks and a sharp moderation in Brent crude price.
At current refining/marketing margin, OMCs’ overall quarterly Ebitda run rate, at Rs 30,000 crore, is two times the historical normalised quarterly Ebitda Rs 15,000-15,500 crore.
"OMCs’ earnings in Q4FY23E are estimated to be in line with historical normalised quarterly Ebitda. This should help them to partly recoup the huge net loss (of Rs 50,000 crore) they incurred in 9MFY23; in the absence of government compensation," it said.
JM Financial said OMCs will take 2-3 quarters to recoup their losses at the current run rate. The brokerage has ‘Buy’ ratings on HPCL (target price: Rs 260) and BPCL (target price: Rs 390) on valuation grounds. It maintained a 'HOLD' rating on IOC (target price: Rs 80) given the company’s continued aggressive capex plans.
The brokerage said OMCs are trading at attractive valuations: HPCL at 0.75 times FY24 P/BV, IOC at 0.8 times FY24 P/BV and BPCL at 1.1 times FY24 P/BV.
"HPCL is a relatively bigger beneficiary of above-normal marketing margin given it is relatively more levered to marketing earnings. Optimism on OMCs will be contingent on crude sustaining below $75-80/bbl and government allowing OMCs to recoup past losses," it said.
ONGC, Oil India still a 'Buy'
JM Financial has maintained 'BUY' on ONGC (Target price: Rs 220) and Oil India (target price: Rs 275) given strong dividend play (of 8-10 per cent) and also because the prevailing stock prices are discounting only $50-55 a barrel net crude.
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