Brent crude oil futures for November delivery have surged to nearly $110 per barrel, marking a sixth consecutive day of increases. This sustained rise in global oil prices is expected to significantly impact various Indian oil and gas companies, with implications varying across upstream producers, oil marketing companies (OMCs), and gas distributors.
OMCs Face Pressure Amid Static Retail Prices
According to Maulik Patel, Head of Research at Equirus Securities, a prolonged period of crude oil prices above $100 per barrel, coupled with unchanged retail prices for petrol, diesel, and LPG, could severely strain OMCs. The extent of this impact hinges on the government's policies regarding retail price pass-through and refining margins (cracks).
Potential challenges for OMCs include:
- Negative marketing margins for petrol and diesel.
- Higher under-recoveries on LPG.
- Increased crude-landing, freight, and insurance costs.
- Accumulation of working capital and debt.
- Inventory losses if crude prices correct sharply after a rise.
HPCL Most Vulnerable Among OMCs
Among the major OMCs, HPCL is considered the most exposed due to its refining-to-marketing ratio of 51 percent, significantly lower than BPCL's 74 percent and IOC's 80 percent. This results in HPCL having the lowest internal refining cover and a greater reliance on imported products. Its distillate yield is also lower at 76 percent, further limiting its ability to capitalize on strong diesel and jet-fuel cracks, contributing to higher leverage.
IOC is positioned second in terms of vulnerability. While its stronger integration offers a refining buffer, its substantial exposure to fuel marketing, LPG under-recoveries, inventory, and expensive crude procurement, along with petrochemical losses, remains a concern.
BPCL appears relatively better insulated, benefiting from superior integration, the highest distillate yield, crude flexibility at its Bina refinery, and a comparatively robust balance sheet.
Mixed Outlook for Gas Distributors and Others
City gas distributors (CGDs) face near-term margin risks due to rising spot LNG prices and crude-linked LNG contracts. Despite this, CGD volumes show resilience, with sector consumption increasing. However, the imported component has also risen sharply.
Gujarat Energy is particularly exposed to higher Brent-linked spot LNG prices and rupee depreciation, though gas-trading profits offer some offset. MGL, however, is better cushioned through its Henry Hub-linked sourcing and proactive pricing strategies, despite some near-term margin volatility.
Petronet LNG and GAIL's Positions
Maulik Patel notes that Petronet LNG is more susceptible to LNG affordability and regasification volumes. Key factors to watch include Qatar normalization, tariff visibility, and petrochemical capital expenditure.
GAIL is viewed as a relatively defensive investment. Its transmission earnings provide a stable buffer, while profitability in petrochemicals and gas marketing is expected to improve with higher realizations.
Upstream Companies and Reliance Industries
ONGC and Oil India are identified as the most direct beneficiaries of elevated crude realizations, a positive trend that, according to Patel, has not yet been fully reflected in their valuations.
Reliance Industries (RIL) maintains a balanced exposure to oil price fluctuations. Its complex Oil-to-Chemicals (O2C) system benefits from robust product cracks, diverse crude baskets, and feedstock flexibility. Additionally, its Jio and Retail segments provide significant earnings diversification. Sustained O2C recovery, growth in Jio's Average Revenue Per User (ARPU) and margins, normalization of Retail margins, and execution of new energy initiatives are considered key catalysts for RIL.
Investment Perspective
Equirus Securities' preferred OMC is BPCL, positioning it as a contrarian call betting on a crude price correction. BPCL's strong refining-to-marketing ratio and high distillate yield offer a more integrated earnings buffer compared to HPCL. The stock is currently trading at a cyclical-low trailing Price-to-Book (P/B) ratio of 1.3 times, suggesting potential for significant rerating if crude prices decline sharply.