GR Exclusive! IOC, BPCL, HPCL: The Maharatnas'; Will The Party Continue In OMC Stocks In 2024?

Oil prices have been under pressure this quarter on continuous concerns related to the demand-supply gap as global supplies are outpacing demand. The decline in oil prices comes despite plans for further production cuts by the Organization of Petroleum Exporting Countries (OPEC) and its allies, with output expanding elsewhere, including in the US. Meanwhile, crude demand growth is likely to slow next year, casting a cloud of uncertainty over the outlook.

India is the third-biggest crude consumer in the world and depends on imports to fulfill its energy needs. The Indian subcontinent is a vital market for oil producers including the Middle East and Russia, with inflows from Moscow accelerating after the Russia-Ukraine crisis in 2022. India's economy grew 7.6% in the third quarter which showed there was an uplift in demand for gasoline, diesel, and other products.

However, Oil demand growth in the key Asian market of India is set to slow next year as the spurt in consumption that followed the pandemic fades, echoing a slowdown in China and presenting a fresh headwind for prices, according to a Bloomberg report.

Consumption will expand by 150,000 barrels a day in 2024, down from about 290,000 barrels a day seen from 2021 to 2023, according to Rystad Energy Head of Oil Trading Mukesh Sahdev. The drop will return growth near the pace seen from 2011 to 2019, he said.

Energy stocks will struggle in 2024, says Citi

According to Citi, energy stocks will struggle in 2024 due to rising spare oil capacity. This is essentially the amount of oil production that can be quickly brought online and sustained for up to 3 months. Historically, energy stocks have underperformed in years with 3 million barrels per day of spare capacity.

Currently, estimates are for an average of 4 million barrels per day of spare capacity. Due to this, the bank is forecasting oil prices to end 2024 in the low $70s. It notes that despite the formation of OPEC+, spare capacity has continued to rise with 80% of the growth coming from the US. YTD, oil prices are down by 4%.

In India, three oil PSU stocks have delivered investors favorable returns in the last couple of months and last year. These PSU companies include Hindustan Petroleum Corp Ltd (HPCL), Indian Oil Corporation Limited (IOCL), and Bharat Petroleum Corporation Limited (BPCL).

HPCL:

HPCL is one of the largest integrated Public Sector Undertaking, engaged in the business of refining Crude Oil and marketing of various petroleum products like Asphalt, Diesel, Kerosene, LPG, Lube Oils, Petrol, branded products like ATF (Aviation Turbine Fuel), Power, Turbojet, Naphtha, throughout India and at select foreign countries. Some of these products are exported to other countries. Hindustan Petroleum Corporation Limited is a Maharatna CPSU and (HPCL) is a Government Company within the meaning of Section 617 of the Companies Act 1956.

The company owns and operates two refineries situated at Mumbai (West coast of India) and Visakhapatnam (East Coast of India)

Hindustan Petroleum Corporation Limited is a Maharatna CPSU and (HPCL) is a Government Company within the meaning of Section 617 of the Companies Act 1956. HPCL is a Central Public Sector Undertaking, with a subscribed capital of Rs. 339.33 Crores, according to the company website as of Dec 18, 2023.

Financial Performance Update:

Hindustan Petroleum Corporation Limited (HPCL) has reported Revenue from operations of Rs 102,618 crore for the period Jul-Sep 2023. For the period Apr-Sep 2023, the Revenues were Rs 2,21,662 crore. The Company has reported the Highest Ever Half-Yearly Consolidated Profit after Tax (PAT) of Rs 12,592 crore during Apr-Sep 2023 (Consolidated Net Loss of Rs 11,033 crore during the corresponding period of the previous year). Standalone PAT during this period was also highest ever at Rs 11,322 crore as compared to Standalone Net Loss of Rs 12,369 crore during the corresponding period of the previous year. The standalone PAT for the period JulSep 2023 was Rs 5,118 crore (Net Loss of Rs 2,172 crore during the corresponding period of the previous year).

HPCL portfolio:

The geopolitical situation that is playing out has impacted the company's operations in terms of our fuel procurement, in terms of product cracks.

In the next five years, the company will invest in enhanced facilities in renewable, gas, biofuels, and also in terms of certain value-added products in our refineries for asphalt and bitumen.

For the next five years HPCL's capex would be around 75,000 Crores around 25 to 30% of the capex would be for the renewables and the gas segment then the refinery would take another 20% and the balance would be on the downstream marketing segment. With respect to the capex, 75,000 Crores for the next five years would mean the average will be around 14 to 15,000 Crores.

HPCL Stock price performance:

HPCL shares have gained 47.50% in the last three months, while the stock is up 38.81% in last six months. The last 1 year, 2-year and three year returns from the stock are 56.22%, 32.01%, and 69.47%. In this year so far HPCL stock price has gained 59.97%.

BPCL:

About Bharat Petroleum Corporation Ltd. (BPCL):

Fortune Global 500 Company, Bharat Petroleum is the second largest Indian Oil Marketing Company and one of the premier integrated energy companies in India, engaged in refining of crude oil and marketing of petroleum products, with a significant presence in the upstream and downstream sectors of the oil and gas industry. The company attained the coveted Maharatna status, joining the elite club of companies having greater operational & financial autonomy. Bharat Petroleum's Refineries at Mumbai, Kochi and Bina Refinery have a combined refining capacity of around 35.3 MMTPA.

Its marketing infrastructure includes a network of installations, depots, energy stations, aviation service stations, and LPG distributors. Its distribution network comprises over 21,000 Energy Stations, over 6,200 LPG distributorships, 525 Lubes distributorships, 123 POL storage locations, 53 LPG Bottling Plants, 70 Aviation Service Stations, 4 Lube blending plants, and 4 cross-country pipelines. Bharat Petroleum is integrating its strategy, investments, and environmental and social ambitions to move towards a sustainable planet.

The company has chalked out the plan to offer electric vehicle charging stations at around 7000 energy stations over the next 5 years. With a focus on sustainable solutions, the company is developing a vibrant ecosystem and a road map to become a Net Zero Energy Company by 2040, in Scope 1 and Scope 2 emissions. Bharat Petroleum has been partnering with communities by supporting innumerable initiatives connected primarily in the areas of education, water conservation, skill development, health, community development, capacity building and employee volunteering. With 'Energising Lives' as its core purpose, Bharat Petroleum's vision is to be the most admired global energy company leveraging talent, innovation & technology.

BPCL Stock price performance:

BPCL shares have gained 24.05% in the last three months, while the stock is up 18.65% in last six months. The last 1 year, 2-year and three year returns from the stock are 30.75%, 16.14%, and 13.43% respectively. In this year so far BPCL stock price has gained 33.96%.

Fitch Affirmed Bharat Petroleum at 'BBB-'; Outlook Stable In October 2023

In October this year, Fitch Ratings affirmed India-based Bharat Petroleum Corporation Limited's (BPCL) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-'. It kept the outlook Stable.

The state directly owns 53% of BPCL and appoints the board. BPCL has in the past received tangible support from India through Parliament-approved subsidies to meet under-recoveries on products sold below market prices, and indirect government support for its overseas upstream acquisitions. The government paid Rs 6 billion to BPCL in FY23 as liquified petroleum gas subsidies and has budgeted Rs 300 billion in capital support to OMCs in FY24.

Fitch expects BPCL's marketing segment to turn profitable in FY24 as crude oil prices fall to Fitch's assumption of USD78.8/barrel, following large losses in FY23 on high crude prices and unchanged retail fuel prices. This should enable BPCL, which reported its highest-ever EBITDA in 1QFY24, to partly recoup the FY23 losses in FY24.

Rising Capex Intensity: Fitch expects BPCL's capex to rise to Rs 250 billion in FY26, from Rs 100 billion in FY24 (FY17-FY23 average: Rs 94 billion).

BPCL's EBITDA net leverage is expected to improve to 1.6x in FY24 (FY23: 3.8x), as a rebound in marketing profits and resilient refining profits will be supported by proceeds from a rights issue, including BPCL's share of the government's approved capital support.

BPCL plans to achieve net zero Scope 1 and 2 emissions by 2040. It targets to increase its renewable energy portfolio to 10GW by 2040 from 50MW currently, to increase ethanol blending in petrol to 20% by FY25 from 11% currently, and to invest in building more petrochemical capacity, green hydrogen plants and carbon capture plants.

Financial Performance of the company:

BPCL reported returning to profitability in the September quarter after a boost in marketing margin improved earnings. According to the company, Consolidated net profit in July-September stood at Rs 8,243.55 crore compared to a loss of Rs 338.49 crore in the same period a year back.

Standalone EBITDA for Q2 FY 23-24 stood at Rs 13,679.21 crore compared to Rs 1,991.41 crore in Q2 FY 22-23.

Pre-tax earnings from the downstream oil refining and marketing business were reported at Rs 11,283.29 crore in the second quarter of the current fiscal against a loss of Rs 123.17 crore in the same period last year.

IOCL:

IOCL Stock price performance:

IOCL shares have gained 34.36% in the last three months, while the stock is up 35.10% in last six months. The last 1 year, 2-year and three year returns from the stock are 61.35%, 65.21%, and 98.53% respectively. In this year so far IOCL stock price has gained 59.49%.

In India, as of August 1, 2023, IOCL owned the highest number of retail outlets (36,527), followed by HPCL (21,290), and BPCL (21,209).

About Indian Oil:

IndianOil is India's flagship Maharatna national oil company with business interests straddling the entire hydrocarbon value chain - from refining, pipeline transportation & marketing to exploration & production of crude oil & gas, petrochemicals, gas marketing, alternative energy sources, and globalisation of downstream operations.

IndianOil, a diversified, integrated energy major with a presence in almost all the streams of oil, gas, petrochemicals, and alternative energy sources. India's highest-ranked Energy PSU in the Fortune-500 list of 2023 (Rank 94), IndianOil recorded Revenue from Operations of ₹9,34,953 Crores and a net profit of Rs 8,242 Crores for the financial year 2022-23. IOCL is one of the leading Petrochemical players in India with a petrochemical production capacity of nearly 3200 KTA.

The state directly owns 51.5% of IOC and 28% through other state-owned enterprises (SOEs), and appoints the company's board. In the past IOC has received tangible state support in the form of subsidies to meet the under-recoveries on products sold below market prices. It has also received indirect government support for its overseas upstream acquisitions.

Fitch expects IOCL's FY24 marketing margins to be below normal

Rating agency Fitch expects IOCL's FY24 marketing margins to be below normal given risks of a reduction in retail prices in 2HFY24 after the fall in crude prices since November 2022. Margins will normalize from FY25 based on Fitch's crude price assumption of USD73.8 per barrel.

High Capex: Fitch expects IOC's annual capex of Rs 304 billion over FY24-FY25 (FY23: Rs 326 billion), largely in refining, marketing, pipeline, petrochemicals, alternative energy, and city gas distribution segments. We expect IOC's refining capacity to increase to 87.9 million metric tonnes (MMT) by FY26 (70.1MMT currently) as it expands Barauni, Koyali and Panipat refineries. Petrochemical capacity should rise to 6.4MMT by FY26 (3.7MMT currently) as it continues forward integration at some of its plants. IOC's high capex in expanding its retail and pipeline network reflects its demand growth expectations.

Credit Metrics to Improve: Fitch expects IOC's EBITDA net leverage to improve and range between 2.5x to 3.0x over FY24-FY26 (FY23E: 3.4x).

Brokerage firm Emkay Global raises its price targets for India's state-run oil refiners - HPCL Ltd., BPCL Ltd., and Indian Oil Corporation Ltd.

While there is a possibility of retail price cuts before the general elections and oil price volatility may continue, brokerage firm Emkay has maintained its constructive view on OMCs as price cuts could be for a brief period. Valuations remain reasonable, with current one-year forward price-tobook multiples being 25-50% lower than the 10-year peak multiples; however, post-election optimism wrt revisiting disinvestment, re-deepening of deregulation and other reforms could drive a further rerating, said the brokerage firm. Emkay has raised its target Sep'25E EV/EBITDA multiple for BPCL/HPCL/IOCL by 0.4x each to 6.0/6.1/6.2x and raised the TP by 9/11/12% to Rs545/445/135, respectively. The brokerage firm has maintained a BUY rating for both, BPCL and HPCL, and an ADD recommendation for IOCL. Near-term stock correction is possible, given the strong & rapid runup, though it would present attractive entry points, said the firm.

What else does Emkay Research report say?

The firm believes that with the probability of the BJP being re-elected to power in the Parliamentary elections of 2024, fear of irrational price cuts and other populist measures affecting OMCs' profitability has subsided. The possibility of price cuts before the general elections still exists, given the recent correction in oil prices; with the national elections scheduled for April-May 2024, the cuts should only be for a brief period.

Post-election optimism revisiting disinvestment, deepening of deregulation and other reforms could drive multiple rerating for OMCs. Fundamentals are strong; lower oil could lead to further earnings upgrade With Brent prices down to USD75/bbl and international LPG prices also peaking in the current cycle, the margin profile of sensitive items has further improved, with dieselpetrol gross-marketing margins at Rs7-12/ltr and LPG under-recovery also peaking-out at Rs90/cyl, though the buffer is likely to cover this.

Brent sustaining at USD75/bbl can lead to further earnings upgrade during Q3-Q4FY24, though oil price volatility could prevail within the USD75-85/bbl range. FY24 dividend outlook is also strong, with both IOCL and BPCL declaring a healthy interim dividend of Rs5/sh and Rs21/sh, respectively. Further, a second interim dividend for IOCL and BPCL can be expected after the Q3 results, though HPCL could declare a one-time final dividend only by end-fiscal.