How should investors approach OMC stocks with churn in crude oil prices

Recent weeks have been a welcome reversal for oil marketing companies (OMCs) with fall in crude oil prices offering optimism on the margins front as it would bring down energy costs, leading to greater demand and lower working capital.

Oil prices fell to a 15-month low, below $75 per bbl on demand concerns amid banking crisis and fears of a recession. Goldman Sachs cut its forecast for Brent crude to $94 a barrel in the next 12 months, and $97 in the second half of 2024, down from $100 previously.

In the short run, crude prices are expected to remain in the range of $80-90 per bbl, according to market analysts, mostly driven by growing consumption in China and India.

Analysts said with lower crude oil prices OMCs can better manage profitability by adjusting marketing margins, supported by more Russian discounted-crude sourcing.

OMC stocks have mostly gained so far this year on a year-to-date basis, with the exception of Continental Petroleum, which lost 5%. Chennai Petroleum Corporation is the top gainer so far among the OMCs pack with 22% rise so far this year, followed by BPCL, whose shares have risen 6% YTD.


The earnings of OMCs have been under pressure for the past few quarters following the Russia-Ukraine war to high energy prices resulting in steep losses. The recovery was strong in the latest third quarter, led by robust refining and marketing margins.

All the three OMCs reported positive net income with a combined profit at Rs 2,740 crore. The refining margins during the quarter stood at $9.1-15.9 per bbl.

Most analysts expect the oil prices to remain benign from hereon on slowing global growth and banking contagion fears. Prabhudas Lilladher expects OMCs to report PAT of Rs 12,800 crore for the fourth quarter.

According to ICICI Securities, earnings prospects for OMCs in FY24 too are set to be stronger as softer crude and product prices offer strong marketing margins. The gross refining margins for FY24E are estimated at $10-11 per bbl on prospects for improving Chinese and Indian demand by the second half of FY24.

The brokerage has a "buy" rating on all three OMCs Indian Oil, BPCL and HPCL.

"At current refining margin and marketing margin, OMCs’ overall quarterly EBITDA run rate, at Rs 30,000 crore, is 2x against the historical normalised quarterly EBITDA of Rs 15,000-15,500 crore, which should help them to partly recoup the huge losses they incurred in 9MFY23," said Dayanand Mittal, Research Analyst, JM Financial.

Dayanand Mittal has a Buy rating on HPCL and BPCL with target prices of Rs 260 and Rs 390 respectively. "However, any spike in crude price and limited recovery of past losses poses near-term risk," he said.

Analysts at Prabhudas Lilladher have HPCL and BPCL as its preferred picks, given higher share of marketing revenues.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)