IOCL, BPCL, HPCL: How Much Profit Do OMCs Lose for Every $5 Rise in Crude Oil Prices?

Synopsis: UBS has turned cautious on India’s oil marketing companies, downgrading Indian Oil Corporation and Bharat Petroleum Corporation Limited to Neutral and Hindustan Petroleum Corporation Limited to Sell. The brokerage warned that a $5 per barrel rise in crude oil prices could wipe out nearly half of sector profits if fuel price hikes are not passed on.

Swiss broking firm UBS has become cautious about Indian oil marketing companies, citing that increasing geopolitical risks and crude oil price volatility may impact their earnings outlook significantly. The broking firm has downgraded Indian Oil Corporation and Bharat Petroleum Corporation Limited to ‘neutral’ from their earlier recommendation and Hindustan Petroleum Corporation Limited to ‘sell’.

While commenting on its downgrade of these companies, UBS said, “Geopolitical tensions are again making crude oil price volatility a key issue to monitor, which reminds us of 2022 crude oil price volatility.” For oil marketing companies, crude oil price volatility may impact their earnings directly, as these companies earn significantly from their fuel marketing business.

According to UBS, if crude oil prices increase by $5 per barrel, almost half of the profits of these oil marketing companies may be lost if these price increases are not passed on to their customers in the form of increased fuel prices.

“An increase in crude prices by $5 per barrel may result in almost half of the profits of oil marketing companies being lost if these price increases are not passed on to customers in the form of increased fuel prices.”

Revisions in Earnings Estimates

In accordance with the risks, UBS has revised the financial estimates for the sector. The broking firm has revised the marketing margins for FY27 and FY28 by 43-45% and 22-26%, respectively, reflecting the continued pressure on retail fuel margins. On the other hand, the gross refining margins are also likely to increase, thereby raising the financial estimates for FY27 and FY28 by 30-48% and 21-39%, respectively.

Although the gross refining margins are likely to increase, the pressure on marketing profitability is seen to be greater, and in accordance with this, the financial estimates for FY27 have been revised by 19% for Indian Oil Corporation, 15% for Bharat Petroleum Corporation, and 46% for Hindustan Petroleum Corporation, reflecting the threat faced by the companies in accordance with the increase in crude oil prices.

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