IOC, BPCL, HPCL lost $2.25 billion due to fuel price freeze: Moody’s

“Based on current market prices, oil marketing companies are currently losing revenue of approximately $25 (over ₹1,900) per barrel and $24 per barrel in sales of gasoline and diesel, respectively.

“Based on current market prices, oil marketing companies are currently losing revenue of approximately $25 (over ₹1,900) per barrel and $24 per barrel in sales of gasoline and diesel, respectively.

India’s largest fuel retailers, IOC, BPCL and HPCL, collectively lost about $2.25 billion (or ₹19,000 crore) in revenue for holding gasoline and diesel prices in elections in five states, including Uttar Pradesh, Moody’s Investors said. Services Thursday.

State fuel retailers have failed to revise gasoline and diesel rates for a record 137 days, despite crude oil prices (raw material for producing fuel sold at the pump) soaring to $120 a barrel, compared to about $82 at the start. November when the hiatus began.

“Based on current market prices, the oil marketing companies are currently experiencing loss of revenue of approximately $25 (over ₹1,900) per barrel and $24 per barrel, respectively, in sales of gasoline and diesel,” Moody’s said in a report.

If the price of crude oil continues to average around $111 a barrel, the three rated entities — IOC, BPCL and HPCL — will incur a combined daily loss of approximately $65-70 million on gasoline and diesel sales unless fuel prices are raised. raised to surging crude oil prices, it said.

This equates to approximately 20% of combined FY2021 earnings before interest, taxes, depreciation and amortization (EBITDA) for the three entities.

The state-owned Indian Oil Corporation (IOC), Bharat Petroleum Corporation and Hindustan Petroleum Corporation (HPCL) raised gasoline and diesel prices by 80 paise a liter each on March 22 and 23, but stopped the hike on Thursday.

Oil companies “will have to raise diesel prices by 13.1-24.9 pounds per liter and 10.6-22.3 pounds per liter on [petrol] at an underlying crude price of $100-120 a barrel,” said Kotak Institutional Equities.

CRISIL Research said an increase of 9-12 per liter in retail sales will be required for a full flow of an average of $100 per barrel of crude oil and ₹15-20 per liter if the average price of crude oil rises to $110- 120.

Moody’s estimated that the IOC’s revenue loss was about $1-1.1 billion, while that of BPCL and HPCL each was about $550-650 million for the period between November and March.

“This loss of revenue will contribute to the short-term borrowing, funded through working capital lines, from the refineries until crude oil prices remain elevated.

“Over time, the companies can recoup some of these losses as oil prices fall,” it added.

While fuel prices in India have been deregulated and refineries can pass on cost increases to consumers, a significant price increase as required in the current oil price environment will be negotiated with the government and could lead to a reduction in excise taxes.

“We expect the government to allow refineries to adjust prices appropriately and avoid a situation where refineries continue to incur losses of this magnitude over an extended period of time,” it said.

Moody’s added that the two-day price increases support the expectation that the increases will happen gradually and over time rather than be a one-off adjustment.

Until such time that refining and marketing companies can cover the increase in raw material costs, either through an increase in selling prices or a reduction in excise taxes, or both, they will have to continue to absorb some of the increased raw material costs, which will increase their profitability. and increasing the loans,” it said.

Continued gains in crude oil prices will also lead to a rise in refinery inventory valuations, which will partially mitigate the impact of lower selling prices.

Higher crude oil prices will also increase the need for working capital, resulting in increasing loans for the refineries.

Lower revenues combined with higher loans will weaken the creditworthiness of downstream companies, the rating agency said.

“A sharp rise in the price of crude oil, combined with the inability of the refineries to raise the retail sales prices of transport fuels in India for more than four months (between November 4, 2021 and March 21, 2022) due to recently concluded elections in five Indian states, will hurt the profitability of the state refinery and marketing companies IOC, BPCL and HPCL,” it said.

However, high oil prices will have a mixed effect on the sector.

While upstream oil and gas producers such as ONGC and OIL will benefit from higher revenues, downstream companies such as IOC, BPCL and HPCL will be negatively impacted due to higher raw material costs and increased working capital requirements.

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