Brokerage downgrades OMC stocks after Brent above $90/bbl plays spoilsport

The brokerage maintains near-term cautious view on all OMCs given their marketing segment earnings comes under risk if Brent crude price sustains above $85 per barrel and the OMCs are forced to cut petrol or diesel prices in the next few months.

Target price for BPCL, HPCL downgraded; ‘Hold’ given for IOCL

The valuations of OMCs are reasonable, however, JM Financials has maintained a cautious view as the sharp jump in crude prices during election season poses a risk to their marketing earnings.

‘’We largely maintain our FY24-25 earnings estimate for OMCs, however we cut target price for: a) HPCL to ₹275 (from ₹300), b) BPCL to ₹400 (from ₹450); and c) IOCL to ₹85 (from ₹90),” said JM Financials.

The downgrade in reduction of TPs is due to reduction in marketing business to 5.0x (from 5.5x) to factor in the risk to marketing segment earnings amidst sharp jump in crude price ahead of a critical election phase in the next nine months, according to the brokerage.

‘’Though we maintain ‘BUY’ on HPCL and BPCL on valuation grounds, and maintain ‘HOLD’ on IOCL given the company’s continued aggressive capex plans (of + INR 250bn p.a. in the next 3-5 years),” said the brokerage.

Brent crude, MCX trading at record highs

Saudi Arabia and Russia on Tuesday extended their voluntary oil cuts to the end of the year, the former to the tune of 1 million barrels per day (bpd) and the latter by 300,000 bpd. 

These are on top of the April cut agreed by the Organisation of Petroleum Exporting Countries and its allies (OPEC+) running to the end of 2024. Investors had expected Saudi Arabia and Russia to extend voluntary cuts into October, but the three-month extension was unexpected.

Brent crude futures rose by $1.04, or 1.2 per cent, to settle at $90.04 a barrel in yesterday’s session, closing above the $90 mark for the first time since November 16, 2022. US WTI futures had gained $1.14, or 1.3 per cent, to settle at $86.69 a barrel, also a 10-month high.

‘’The upside risk to crude price exists as we believe OPEC+ will continue to support Brent crude price above $75-80/bbl, which is the fiscal break-even crude price for Saudi Arabia, given their strong pricing power,” said JM Financials.

On Wednesday, oil prices have so far reversed gains after rising over 1 per cent to a 10-month high level in the previous session after the output cuts were announced. However, so far in today’s session, the US dollar has firmed up and investors shrugged off jitters arising from tightening supply.

Brent crude futures fell by 50 cents to $89.56 a barrel. US West Texas Intermediate crude (WTI) futures traded at $86.58 a barrel, down 31 cents, according to news agency Reuters. 

Back home, on the Multi Commodity Exchange (MCX), crude oil futures due for a September 19 expiry, were last trading higher by 1.21 per cent at ₹7,305 per bbl, having swung between ₹7,145 and ₹7,305 per bbl during the session so far, against a previous close of ₹7,218 per barrel.

Against a basket of currencies, the dollar was at 104.69, not far off the six-month high of 104.90 touched overnight. A stronger dollar can weigh on oil demand by making the fuel more expensive for holders of other currencies.

Updated: 06 Sep 2023, 09:42 PM IST