InvestorQ : Why are oil marketing companies like IOCL, BPCL and HPCL expected to report losses in the June 2022 quarter?
ishika Banerjee made post

Why are oil marketing companies like IOCL, BPCL and HPCL expected to report losses in the June 2022 quarter?

1 month ago

For the quarter ending June 2022 or Q1FY23 as it is better called, the 3 major OMCs viz. Indian Oil Corporation (IOC), Bharat Petroleum and Hindustan Petroleum, could be in for troubled times. These 3 companies are expected to report a combined net loss of Rs10,700 crore. That is largely because, these 3 companies are currently selling petrol and diesel much below the landed cost of crude oil, leading to losses. Currently, IOCL, HPCL and BPCL account for nearly 88-90% of all fuel that is retailed in India.

Remember, the 3 OMCs are all into refining and also into marketing of petrol and diesel. Indian oil refining companies have been having a gala time with record Singapore gross refining margins (GRMs), hovering above $22/bbl. Despite record GRMs and inventory translation gains, the three companies are likely to lose out heavily on marketing margins. That is because these OMCs are still selling petrol and diesel and steeply regulated prices and much below their cost. The net impact is likely to leave these companies with losses.

Currently, for every litre of petrol and diesel sold by these oil marketing companies via their retail fuel pumps, they are losing Rs12-14 per litre. This is neutralizing the benefits of strong refining performance during the quarter. Even in the June 2022 quarter, GRMs are expected to be strong around $17-18/bbl but if you add the marginal inventory losses and the massive negative margin son selling petrol and diesel, then you have a situation wherein these 3 oil companies would end up with deep losses in the Q1FY23 quarter.

On an EBITDA basis, the combined loss of IOCL, BPCL and HPCL for the June 2022 quarter is estimated to be around Rs6,600 crore. However, on a net bottom line basis, this would translate into a net loss of Rs10,700 crore for the OMCs overall. However, things may be bottoming out in the coming months as the price of crude prices are tapering. For example, the crude prices have fallen now from a high of $140/bbl to $105/bbl and have even briefly dipped below $100/bbl. That should give some relief to OMCs.

This problem came to the fore after the government put a freeze on petrol and diesel prices amidst the elections in early 2022. That was also the time when crude spiked sharply due to the Russia Ukraine war and the subsequent sanctions. Price hikes on petrol and diesel is supposed to be an economic decision only up to a point. Beyond that, the decision becomes political and social. In the past ,governments lost elections when they have tried to ignore inflation, so nobody is taking chances. Whey oil is sharply up, it is a problem for all.