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.

OMCs float season's 2nd tender, seek 2.5 bn litres ethanol from sugar mills

OMCs procure ethanol as a ready green fuel for blending directly with petrol which reduces import of crude oil proportionately and also encourages sugar mills to earn higher from by-products. This year sugarcane crop was damaged in the monsoon flood rendering thereby lower availability. The government has fixed ethanol procurement price of Rs 59 a litre with a variation of a couple of rupees depending upon the proximity of supply.

Data compiled by ISMA showed OMCs had floated tenders for requirement of 3.32 billion litres of ethanol last cane crushing season (October 2018 – September 2019). Of which, OMCs finalised ethanol supply for 2.39 billion litres and they contracted for 2.45 billion litres. Interestingly, OMCs lifted only 1.87 billion litres during last crushing season.

The ethanol requirement quantity for the current season, however, has increased as OMCs are looking to achieve 5 per cent of blending target.

“A number of sugar mills have set up their independent distilleries and existing ones have expanded capacity to increase its supply in future,” said Verma.

Vijay Banka, Managing Director, Dwarikesh Sugar Industries, said, “ we have commissioned new 100 KLPD (kilo or thousand litres per day) distillery plant at Bijnor facility in UP. The capital expenditure of approximately Rs 145 crore will enable benefits to accrue across the foreseeable future.”

Lower cane availability is also impacting sugar production. ISMA reported 26 per cent decline in India’s sugar production at 10.86 million tonnes for the period between October 1, 2019 and January 15, 2020 as compared to 14.74 milion tonnes produced for the same period last year.

Combined debt of state-run OMCs hits five-year high of Rs 1.62 trillion

The combined consolidated borrowing of oil-marketing majors Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL) touched a five-year high of Rs 1.62 trillion at the end of March 2019, up 30 per cent from Rs 1.25 trillion a year ago.

IndianOil’s total debt stood at Rs 92,712 crore as of FY19-end, followed by Rs 42,915 crore of BPCL and Rs 26,036 crore of HPCL. The three companies together added Rs 36,402 crore to the debt pile, according to the Capitaline data.

The rise in debt was mainly because of higher capital expenditure and delays in subsidy payment, of around Rs 33,900 crore, for liquefied petroleum gas and kerosene from the government, as it tried to maintain fiscal balance. The 2018-19 debt figures, however, were still less than the FY14 combine consolidated debt of Rs 1.76 trillion for the three companies, when oil prices were above $100 a barrel.

“IOC has a larger capital expenditure plan compared to BPCL and HPCL. What works for HPCL is its larger marketing operations, which bring in stronger cash flows. In addition, HPCL has had a more modest capex plan, while BPCL has exploration and production as well as city gas distribution,” said a senior oil and gas analyst, who did not want to be named. 

According to a Bank of Baroda Capital report, the debt for all three OMCs bloated by Rs 5,000 crore to 10,000 crore each in the March quarter due to delays in subsidy payment.

“Our debt for the financial year has increased to Rs 81,000 crore as of now, mainly owing to the government dues of around Rs 19,000 crore — out of which Rs 13,883 crore was on account of direct benefit transfer on LPG, Rs 3,395 crore was on kerosene, and the remaining Rs 2,000 crore went as PMUY deposit,” said A K Sharma, whose term as director (finance) at IndianOil got over on May 17.

Higher dividend payout to the government, arrears, and entry tax for Mathura Refinery were major reasons for higher borrowings by IndianOil.

Subsidy arrears create working capital issues, especially since the companies largely depend on import for crude oil.

The rupee averaged at 69.5 a dollar in 2018-19 compared to 64.48 in 2017-18. The rupee devaluation happened at a time when the benchmark Indian crude oil basket, too, rose by about 18 per cent to $69.8 a barrel in 2018-19. 

“The increase in borrowings for the oil-marketing companies is credit negative, especially amidst an uncertain refining margin environment,” said Vikas Halan, senior vice-president, Corporate Finance Group, Moody’s Investors Service. He added, “The increase in borrowings is largely driven by high shareholder returns — in the form of both dividends and share buybacks, large capital spending, and high working capital outflow because of elevated oil prices.”

Halan expects the debt rise to be contained since no significant share buyback is expected in the current financial year. “Reduction in borrowings will be positive and could be driven by a decline in oil prices or faster reimbursement of subsidies by the government. We also do not expect a meaningful share buyback in fiscal 2020,” he added.

However, a few others expect debt for the three OMCs to continue to remain high. “Most of the debt increase seen in the last three years is largely capital expenditure-driven, which will continue in the current year. So I expect debt to be higher from the present levels,” said another oil and gas analyst.

According to Petroleum Planning and Analysis Cell, IOC is expected to invest Rs 25,084 crore as capex in the current financial year, while BPCL will spend Rs 7,900 crore, and HPCL Rs 9,500 crore.