By Manish Gupta
The fourth quarter of FY23 likely marked a turnaround in the earnings of downstream oil and gas companies. State-run oil marketing companies (OMCs) likely made high “over-recoveries” on transport fuels with no retail price cut despite a moderation in crude oil prices and diesel cracks. In addition, their refining margins too remained resilient.
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“After a weak 3Q, 4Q should be sequentially better for most names. For RIL, we expect qoq better earnings in all key segments. Oil marketing companies should benefit from fuel over-recoveries and resilient refining margins,” Kotak Institutional Equites said in a report.
Kotak expects RIL’s consolidated EBITDA to increase 4% qoq and 16% yoy. In oil to chemicals (O2C) business, refining margins remain resilient, windfall tax impact should be further reduced, and there would be marginal recovery in petchem, it said.
While OMCs had a strong fourth quarter, they would still have a weak full-year result, and Hindustan Petroleum Corporation Ltd (HPCL) would likely report a loss and Bharat Petroleum Corporation Ltd (BPCL) a marginal profit in fiscal year 2022-23, Kotak said.
For city gas distribution companies (CGDs), the volumes might have been flat as elevated prices impacted demand. “However, margins should improve sequentially for both IGL and MGL on lower gas costs (HPHT tie-up) and the full benefits of price hikes taken in 3Q,” the report said.
The government’s decision last Thursday to revise the natural gas pricing formula resulting in a fall from $8.57/mmBtu to $6.5/mmBtu would ease pressure on CGDs as their margins were impacted by earlier sharp rise in domestic gas prices.
“The move is more positive for IGL (Indraprastha Gas Ltd) and MGL (Mahanagar Gas Ltd) as their segmental revenues are dominated by CNG and domestic
PNG volumes, which are prioritised for the use of APM (Administered Pricing Mechanism) gas,” ICICI Direct Research said in a note. Going ahead, the cash flow for these companies would certainty improve, it added.
Upstream companies continued to benefit from high APM prices of $8.57/mmBtu in the fourth quarter.
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“While oil prices were lower by 8%, due to lower windfall taxes, we expect net oil realisation to be 1-2% higher. However, due to qoq weaker volumes (fewer days in 4Q), we expect EBITDA to decline 2% qoq for both ONGC and Oil India,” Kotak said.
Going forward, the revision in gas pricing method is likely to reduce both ONGC and Reliance Industries’ gas realisation when compared to the previous six months but is still remarkably higher than what they were earning historically, the ICICI report said.
However, it noted that this pricing mechanism would provide stability to their realisations as well.