Higher crude oil prices a net positive for upstream cos, possibly for OMCs too: Kotak Equities
The recent rise in crude oil prices may prove beneficial not only for
upstream oil companies
but also for oil marketing companies (OMCs), according to a report by domestic brokerage firm
Kotak
Institutional Equities.
In a recent note, the brokerage highlights that the latest rally in oil prices, with Brent crude being up 15% since early June, could aid upstream companies such as
ONGC
and
Oil India
by lifting their net realizations and earnings.
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"Brent has moved up to US$85/bbl from US$74/bbl earlier in the month," the brokerage said, adding that every US$1/bbl increase in Brent prices adds Rs 2.4–2.5/share to ONGC's EPS and Rs 3.5–4/share to Oil India's EPS, assuming no changes in government levies.
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According to Kotak, ONGC's base case assumes an oil price of US$80/bbl
Interestingly, the brokerage also sees the potential for OMCs to benefit from higher oil prices under current market conditions. 'Oil marketing companies (
BPCL
,
HPCL
,
IOCL
) may benefit too, if the government maintains current pump prices,' Kotak stated.
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The report notes that despite the recent increase in Brent prices, auto fuel prices have remained unchanged in India, implying potential margin expansion for OMCs.
"OMCs are seeing marketing margins rise to Rs 5.6/liter for diesel and Rs 7/liter for petrol," the report stated, assuming average Brent at US$85/bbl and a USD/INR exchange rate of 83.
Furthermore, Kotak points out that HPCL's marketing EBITDA was Rs 3.5/liter in FY24, suggesting that current margin levels may offer substantial upside if they persist. The firm acknowledges that while refining margins remain modest, the improving marketing profitability may offset those concerns.
On refining, the brokerage notes that gross refining margins (GRMs) continue to be relatively weak, with Singapore complex GRM currently at US$3.5–4/bbl, and diesel cracks at US$13–14/bbl, which are below seasonal averages.
Also read:
HDB Financial Services GMP at 6.3% ahead of IPO. What should investors do?
Nevertheless, the note emphasizes that product cracks are not as weak as GRMs suggest, and that the margins are still reasonable.
While acknowledging the volatility in the crude market, Kotak Institutional Equities underlines that higher oil is unequivocally good for upstream companies and may not hurt OMCs in the near term either.
The brokerage firm also stated that it continues to prefer
ONGC
and
Oil India
among upstream players and maintains a 'buy' rating on both stocks.
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