IOC, BPCL, HPCL lost $2.25bn on fuel price freeze: Moody’s


‘Based on current market prices, oil marketers are currently losing around $25 (over £1,900) per barrel in revenue or $24 per barrel selling petrol and diesel respectively’

‘Based on current market prices, oil marketers are currently losing around $25 (over £1,900) per barrel in revenue or $24 per barrel selling petrol and diesel respectively’

India’s top fuel retailers IOC, BPCL and HPCL collectively lost about $2.25 billion (or £19,000 million) in revenue after they put petrol and diesel prices on hold during elections in five states, including Uttar Pradesh , Moody’s Investors Services announced on Thursday.

State fuel distributors failed to adjust gasoline and diesel prices for a record 137 days, even as prices for crude oil (a raw material used to make fuel sold at retail pumps) rose to $120 a barrel, compared with around $82 in early November when the disruption began.

“Based on current market prices, oil marketers are currently suffering a loss in sales of around $25 (over £1,900) per barrel, or $24 per barrel selling gasoline and diesel,” Moody’s said in a report.

If crude oil prices continue to average about $111 a barrel, the three rated companies — IOC, BPCL, and HPCL — will suffer a combined daily loss of about $65 million to $70 million from sales of gasoline and diesel, so be it as fuel prices will be hiked to match rising crude oil prices, it said.

That’s about 20% of combined earnings before interest, taxes, depreciation and amortization (EBITDA) for fiscal 2021 for the three companies.

State-owned Indian Oil Corporation (IOC), Bharat Petroleum Corporation and Hindustan Petroleum Corporation (HPCL) hiked gasoline and diesel prices by 80 paise a liter each on March 22 and 23, but halted hikes on Thursday.

Oil majors “need to raise diesel prices further by £13.1 to £24.9 per liter and £10.6 to £22.3 per litre [petrol] at an underlying crude price of $100-120 per barrel,” according to Kotak Institutional Equities.

CRISIL Research said it will take a £9-£12 per liter retail price increase to report an average of £100 per barrel of crude oil and £15-£20 per liter if the average crude price rises to $110-$120.

Moody’s estimated IOC’s revenue loss at around $1 billion to $1.1 billion, while BPCL and HPCL’s were around $550 million to $650 million each for the period between November and March.

“This loss of revenue will contribute to refiners’ short-term borrowings, which will be funded with working capital lines until crude oil prices remain at elevated levels.

“Over time, companies could recoup some of those losses as oil prices fall,” she added.

While fuel prices in India are deregulated and refiners are able to pass cost increases on to consumers, a sharp price hike, such as that required in the current oil price environment, will be coordinated with the government and may include a reduction in excise duties.

“We expect that the government will allow refiners to adjust prices appropriately and avoid a situation where refiners continue to make losses of this magnitude for an extended period of time,” it said.

Moody’s added that the two-day price hikes reinforce expectations that the increases would be gradual and occur over a period of time, rather than being a one-off adjustment.

“Until that time, refining and marketing companies can meet the increase in raw material costs either by increasing selling prices or reducing excise taxes or both, they must continue to absorb some of the increased raw material costs, which will affect their profitability and increase borrowing,” it was said.

A sustained increase in crude oil prices will also result in inventory valuation gains for refiners, which will partially mitigate the impact of lower selling prices.

Higher crude oil prices will also lead to increased working capital requirements, resulting in additional borrowing for refiners.

Poorer earnings combined with higher borrowing will weaken downstream companies’ credit metrics, the rating agency said.

“A sharp rise in crude oil prices coupled with the inability of refiners to raise retail selling prices for transportation fuels in India for more than four months (between November 4, 2021 and March 21, 2022) due to recently completed elections in five Indian states, will affect the profitability of the state-owned refining and marketing companies IOC, BPCL and HPCL,” it said.

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

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

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