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Oil Marketing Companies to Face Profitability Pressures : Report

ICRA Ratings expects the profitability of downstream oil and gas players or oil marketing companies (OMC)s to face profitability pressures in the near to medium term due to several factors.

January 17, 2023. By News Bureau

ICRA Ratings expects the profitability of downstream oil and gas players or oil marketing companies (OMC)s to face profitability pressures in the near to medium term due to several factors.

The benchmark Singapore GRMs has been witnessing an increasing trend since December 2021 backed by strong product demand in turn supported by a pick-up in the manufacturing, industrial and other allied sectors; and improved crack spreads across various fuels. Further, the overall improvement in mobility along with a pick-up in air travel has further supported the demand strengthening the crack spreads.

However, the GRMs have started to moderate now, even as the cracks for gasoil and aviation turbine fuel continue to remain healthy. Amid the elevated GRMs, the GoI imposed special additional excise duty (SAED) on certain refinery products w.e.f. July 1, 2022, which has pared the profitability of the refiners to some extent.

The current duty on the export of diesel is Rs. 7.5/litre and on ATF is Rs. 4.5/litre and ICRA expects the total collection by the GoI from these duties to be around Rs. 23,000 crore in FY2023 from downstream companies.

Giving further insights on downstream companies, Prashant Vasisht, Vice President and Co-Group Head – Corporate Ratings, ICRA Limited, said, “The retail prices of auto fuels have not been revised for an extended period of time, which has resulted in sizeable marketing losses for oil marketing companies. In September 2022, the government announced a one-time grant of Rs. 22,000 crore to the oil marketing companies to offset the losses incurred on LPG sales. However, the oil marketing companies have been demanding additional grant to set off the marketing losses on auto fuels. Nevertheless, the credit profile of the downstream companies is not expected to weaken substantially as credit metrics are expected to remain healthy over the medium term besides which several incumbents enjoy sovereign ownership and exceptional financial flexibility.”.

Says Sabyasachi Majumdar, Senior Vice President and Group Head – Corporate Ratings, ICRA Limited, “The GoI imposed special additional excise duty or windfall tax on crude oil and certain refinery products w.e.f. July 1, 2022. The current duty on crude oil is Rs. 2100/tonne and ICRA expects the total collection by the GoI from this duty to be around Rs. 20,000 crore for FY2023 from upstream companies. Despite the imposition of the SAED, the net realisations of upstream companies on crude oil sales remain healthy at above $75/bbl, at which levels capex plans would not be impacted. Elevated crude and domestic gas prices translate into healthy realisations and cash flows for upstream producers.”

Commenting on the recommendations of the Kirit Parikh Committee, Vasisht concludes, “The recommendations of the committee are pragmatic and balanced taking in view the interests of both consumers and producers of gas. From the consumer’s perspective, lower gas prices are a positive. The reduction in gas price should result in a cut in CNG and PNG (domestic) prices by the CGD players and would improve the conversion economics for the end consumers thereby stimulating demand. Lower domestic gas prices would also reduce GoI’s subsidy burden for the fertilizer sector. However, at the current elevated gas prices, the credit profile of most incumbents in the gas utilities sector is not expected to weaken substantially owing to the regulatory protection or dominant competitive position of most of the entities in this sector besides nil or low leverage, robust liquidity and strong financial flexibility, even as the margins witness a decline”.

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