Oil & Gas sector set for sharp earnings drop in Q2 amid lower GRMs, other factors; what brokerage recommends on IGL, BPCL, IOCL

In the second quarter of the financial year, 2022-23 (Q2FY23) operating profit of the Indian Oil sector is expected to fall 81 per cent quarter-on-quarter (QoQ), led by lower GRMs (gross refining margins), windfall taxes impacting upstream earnings, inventory loss and high diesel marketing losses.

Domestic brokerage Prabhudas Lilladher expects OMCs (Oil Marketing Companies) to report losses of Rs 404 billion in Q2, given continued pain in marketing losses and lower GRMs along with marketing inventory loss of Rs 100 bn.

The Q2 diesel marketing margins were at – Rs10/litre ( Q1 loss of Rs15/litre), while petrol marketing losses came down to Rs0.8/litre from Rs11/litre, the brokerage said, calculating marketing inventory losses at Rs 100 bn for Q2 vs Rs 13 bn in Q1 for HPCL and BPCL.

Upstream companies will see operating earnings drop to Rs 218 bn versus Rs 285 bn in Q1, due to the imposition of windfall taxes of USD27/bbl, Prabhudas Lilladher said, adding that the net crude oil realization will likely be at USD73. Production and sales volumes are likely to be muted, it added.

Strong volume growth for IGL (Indraprastha Gas)/MGL (Mahanagar Gas) is expected, the brokerage said. It also factored in improvement in margins, due to higher supplies of domestic gas which was effective for the second half of Q2. CGD (city gas distribution) earnings will be hit by weak performance from Gujarat Gas, it added.

The brokerage cut earnings sharply for OMCs by 20-50 per cent as it increases borrowings to factor in losses of around Rs 600 bn for H1FY23. Diesel marketing margin environment remains volatile and depends on how the European winter demand shapes up, it added.

Prabhudas Lilladher also said that losses have come down as crude prices have corrected around 25 per cent from the Q1 average due to recession fears. However, any sharp spike in crude prices due to higher demand will further escalate losses as spreads continue to remain high at USD30/bbl.

The brokerage changes its recommendation for BPCL/IOCL to Reduce from Hold based on 7x FY25 EV/E, while continuing to maintain Hold for HPCL.