HPCL, BPCL to IOCL: OMC stocks rally up to 5% as crude prices slip below $70; Emkay says OMCs in ‘sweet spot’

Shares of Indian oil marketing companies (OMCs) surged on March 6, as Brent crude oil prices fell below the $70 per barrel mark, hitting their lowest level in three years. The decline in oil prices sparked a rally in Bharat Petroleum Corporation Ltd. (BPCL), Hindustan Petroleum Corporation Ltd. (HPCL), and Indian Oil Corporation Ltd. (IOC), sending their stocks up to 5 per cent higher.

BPCL climbed 3.2 per cent to a high of ₹264.20, HPCL surged 4.8 per cent to ₹342.30, and IOC advanced 3.7 per cent to ₹126.75 on the BSE.

Brent declines as OPEC+ plans to unwind production cuts

The drop in crude prices came as OPEC+ announced plans to gradually reverse its voluntary production cuts. The oil-producing alliance aims to add back 2.2 million barrels per day (mbpd) of crude to the market over the next two years, representing 38 percent of the 5.9 mbpd supply cuts since 2022.

While the move was largely anticipated, Emkay Global Financial Services believes that lower crude prices remain favorable for India’s OMCs, though the impact on upstream producers like Oil and Natural Gas Corporation (ONGC) and Oil India could be limited.

In today’s deals, Brent futures were trading up 39 cents, or 0.56 per cent, at $69.69 a barrel by 0416 GMT, while U.S. West Texas Intermediate crude (WTI) futures climbed 39 cents, or 0.59 per cent, to $66.70 a barrel.

Brent plunged 6.5 per cent in the previous four sessions, dropping to its lowest since December 2021, while WTI fell 5.8 per cent over the same period to its lowest since May 2023.

OMCs positioned for higher margins amid falling crude prices

Emkay Global noted that Brent at $70 per barrel could push OMCs into a “sweet spot”, enabling them to earn higher marketing margins on auto fuels.

At this crude price level, gross marketing margins for diesel and petrol stand at ₹8 and ₹12 per liter, respectively, which Emkay believes is sufficient to offset losses of approximately ₹250 per cylinder on LPG sales.

While there are concerns regarding potential retail fuel price cuts or an excise duty hike, Emkay expects government support, including a possible ₹200 billion LPG subsidy, as indicated by statements from the petroleum ministry and OMC executives.

For upstream producers ONGC and Oil India, Emkay anticipates a 6-9 per cent earnings cut if crude prices remain in the $70-75 per barrel range. However, the brokerage noted that these stocks have already corrected in anticipation of lower realisations, limiting the downside.

Despite the potential earnings revision, Emkay retained its target prices for ONGC at ₹270 and Oil India at ₹510, implying an upside potential of 20 per cent and 40 per cent, respectively, from current market levels.

Additionally, strong production data could support these stocks. ONGC’s oil output increased by 1.5 per cent YoY in January, driven by its KG 98/2 asset, while Oil India’s gas production rose 7 per cent. However, overall crude oil output remained subdued, growing just 1 percent YoY.

Meanwhile, GAIL’s petrochemical and gas marketing segments may face headwinds from lower crude prices, as its petrochemical realizations are oil-linked. Moreover, spreads in GAIL’s U.S. LNG sales could tighten due to stable Henry Hub gas prices at $4.4 per million British thermal units (mmbtu).

However, Emkay maintained a positive view on GAIL, citing the upcoming pipeline tariff hike as a key catalyst. The brokerage believes that the company’s current valuations remain reasonable, despite near-term challenges.

Sector Outlook: OMCs favored despite crude volatility

While falling crude prices raise concerns over upstream realizations, Emkay remains constructive on the sector, ranking its preferences as OMCs first, followed by upstream producers and GAIL. The brokerage believes that valuation attractiveness and supportive government policies could help offset near-term oil price volatility.

With Brent crude expected to stay in the $70-75 per barrel range, India’s oil marketing companies could see sustained profitability, while upstream producers and gas companies may experience short-term margin pressures.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.