HPCL, BPCL, Indian Oil poised for gains with oil prices at 18-year low

Investor sentiment towards state-owned oil marketing companies (OMCs) such as Hindustan Petroleum (HPCL), Bharat Petroleum (BPCL) and Indian Oil (IOC) has improved sharply with crude oil prices falling to 18 year low. Shares of the OMCs, after hitting 52-week lows recently, rebounded by up to 15 per cent on Tuesday. And, they could see further gains.

The soft crude oil prices bode well for these companies, which may see a rise in their marketing margins, decline in working capital requirements and zero risks of subsidy burden. Even the government will get an opportunity to roll out more reforms on kerosene and cooking gas pricing, which will be positive for the OMCs. Thus, despite near term concerns on fuel demand getting impacted led by recent shutdown in the country and also weak refining margins, OMCs still remain well placed for growth, feel analysts who see demand rebounding fast once the lockdown gets over. The outlook on marketing margins (on retailing fuels such as petrol and diesel) too remains strong. Yogesh Patil at Reliance Securities says that for every $1 per barrel fall in crude prices, net marketing margin of OMCs rises by Rs 0.45 per litre (45 paise). However, some of these gains may get offset if the government raises duties on retail fuels.

Analysts at Kotak Securities say that their estimate of gross retail marketing margins (on per litre basis) on diesel and gasoline increased week-on-week to Rs 11.8 and Rs 13.3, as on March 27, 2020 from Rs 8.1 and Rs 7.1, respectively, a week ago. On the positive side, margins for key polymers also increased in the recent week led by a decline in naphtha and gas prices. The concerns had remained high on petrochemical margins too.

What’s more, experts such as Yan Chong Yaw, Director of Oil Research & Forecast, Refinitiv (formerly Thomson Reuters Financials and Risks) say that the global oil demand for 2020 is set to contract for the first time in over a decade at 99.9 million barrels per day. This implies global crude oil prices are likely to remain soft moving forward too. Hence, the expected benefits for domestic OMCs are likely to sustain.

Amongst the OMCs, HPCL, having highest share of retail sales in overall revenues, remains best placed to gain from the better outlook for marketing margins. Not surprising, the stock gained 13.12 per cent on Tuesday compared to 6.66 per cent gains recorded by IOC. For IOC, concerns are more as compared to HPCL. Reuters Singapore complex gross refining margins (GRMs) have remained in negative territory during the last two weeks. Also, as per Emkay Global data, IOC is likely to see 20-30 per cent hit in its refining throughput compared to 10-20 per cent hit felt expected for HPCL and slightly more than 10 per cent for BPCL, given the lockdown. Thus, among the three, BPCL gained the most, more than 15 per cent, on Tuesday. Though there has some delay, with the government having decided to sell its stake in BPCL, the stock is likely to see further upside. The three OMCs also offer strong dividend yield of more than six per cent which makes them attractive investment bets too.