Results preview: OMCs to ride the low crude oil gravy train in Q1

City gas firms will see profits rise due to capped domestic prices, say analysts

Lower crude oil costs and higher marketing margins are expected to raise the fortunes of oil marketing companies (OMCs) in the first quarter (Q1) of 2023-24 (FY24), while city gas distribution (CGD) companies could also benefit from lower spot prices of liquefied natural gas (LNG).  However, in a break from the past, growth trends are expected to diverge for various segments within the broad energy sector.

Analysts expect the earnings from gas production to go down for upstream national oil and gas companies such as Oil and Natural Gas Corporation (ONGC) and Oil India (OIL) due to the introduction of the new domestic gas pricing regime on April 1. After showing steep losses over the first half of 2022-23 (FY23), the marketing margins of OMCs have steadily recovered in four months.

Analysts expect OMCs’ results to be operationally better, owing to a major recovery in marketing gains of blended margins at Rs 8–9 per litre of fuel sold in Q1FY24, up from Rs 3 per litre in the fourth quarter (Q4) of FY23.

Analysts expect these higher margins, notwithstanding relatively lower gross refining margins (GRMs).

GRM is the amount refiners earn from turning every barrel of crude into refined fuel products. The benchmark Singapore GRM averaged a lower $4.1 per barrel in Q1FY24, down from $8.2 per barrel in Q4FY23.

In 2022, with the supply of refined products reducing as a result of supply disruptions of Russian oil and lower exports of petroleum products from China, GRMs had risen quickly to a record high of $25.2 per barrel. As a result, Indian refiners have seen their earnings go up.

But as Moscow raised supplies to the international market late last year to increasingly fund its war in Ukraine, GRMs quickly dropped. However, Indian OMCs have continued to secure oil at a discount from Russia.

“While refining profits will be lower, recovery in marketing margins will drive Q1 profit after tax (PAT) for OMCs to Rs 242.7 billion, up from Rs 211.2 billion in Q4,” stated Prabhudhar Lilladher in a report. Meanwhile, softer domestic gas costs, sharply lower spot LNG prices, and lower-term LNG prices are set to raise PAT of CGDs by up to 25 per cent.

Gas producers face heatIt added that national oil companies like ONGC and OIL are expected to maintain production volumes but will see lower gas realisations, given that gas prices have been capped at $6.5 per million British thermal unit (mBtu).

As a result, the operating earnings of these companies may reduce by 36 per cent, and net earnings may drop 51 per cent on an annual basis, ICICI Securities pointed out in a recent note.

About 83.3 per cent of India’s natural gas is produced by ONGC and OIL, while the remainder 16.7 per cent is produced by private companies and joint venture entities. In early April, the government amended the administered price mechanism for the domestic pricing model of natural gas in line with the recommendations of the Kirit Parikh Committee on gas pricing. One key government decision was to cap the rates for final consumers at $6.5 per mBtu. This is based on a new formula of gas prices being pegged at 10 per cent of the international price of the Indian crude basket.

The companies will, however, benefit from the Centre’s move to ensure the windfall tax rate for crude is kept at a level that ensures a steady range of $72-75 per barrel net crude realisations for these companies.

With the drop in global prices, the Centre on May 16 cut the windfall tax on domestically produced crude to zero from Rs 4,100 per tonne. It had kept unchanged the windfall tax on petrol, diesel, and aviation turbine fuel at zero.