HPCL, BPCL, IOC Shares Fall Amid Crude Oil Rebound and Middle East Tensions
Contents
On October 3, shares of India’s state-run oil marketing companies (OMCs)—Hindustan Petroleum Corporation Ltd. (HPCL), Bharat Petroleum Corporation Ltd. (BPCL), and Indian Oil Corporation Ltd. (IOC)—fell by up to 6%. The decline comes amid rising crude oil prices due to escalating tensions in the Middle East, reversing the recent gains these stocks had made.
- Market Performance of OMC Shares
- HPCL: After an impressive eight-day winning streak, HPCL shares saw a drop of up to 6%.
- BPCL and IOC: Both companies saw declines for the second consecutive day. BPCL has lost momentum, while IOC continues to underperform its peers.
- Year-to-Date Performance
- Despite the recent drop, HPCL shares have gained 57%, and BPCL has risen 55% in 2024.
- IOC, however, has shown slower growth, with an increase of 32% year-to-date, underperforming compared to HPCL and BPCL.
- Crude Oil Price Impact
- Crude oil prices rebounded on Wednesday, October 2, due to concerns over the ongoing Middle East conflict, which could potentially disrupt oil supplies from this key producing region.
- Brent crude prices rose to $73.90 per barrel, and US West Texas Intermediate (WTI) crude increased to $70.10 per barrel.
- However, these gains were limited by a large build-up in US crude inventories.
- Refining Margins and Fuel Price Concerns
- Probal Sen from ICICI Securities highlighted that refining margins experienced a significant downturn in September, with Singapore Gross Refining Margins (GRMs) falling to $2.5 per barrel.
- There are concerns that OMCs may have to reduce retail fuel prices, and their ability to absorb rising crude oil costs is in question. If crude oil prices rise above current levels, OMCs could face serious challenges.
- The recent margin cushion for OMCs, driven by higher marketing margins (₹10-11 per litre), may no longer be sufficient to cover the sharp drop in GRMs and potential inventory losses.
- Analyst Views and Brokerage Ratings
- JM Financial: The brokerage firm has taken a cautious stance on OMCs, stating that their current marketing margins are unsustainable. Despite a recent drop in share prices, they maintain a bearish outlook on the OMCs, citing unfavorable risk-reward ratios.
- HPCL: The brokerage has a ‘Sell’ rating with a target price of ₹290 per share.
- BPCL: A ‘Hold’ rating is given with a target price of ₹290 per share.
- IOC: A ‘Sell’ rating is maintained, with a target of ₹150 per share.
- Oil India and ONGC: JM Financial remains bullish on Oil India and ONGC, maintaining ‘Buy’ ratings due to the companies’ strong production growth outlook and the benefits of NRL capacity expansion.
- Company Valuations
- As of Thursday afternoon:
- HPCL: Market capitalization stood at ₹88,911 crore.
- BPCL: ₹1.52 lakh crore.
- IOC: ₹2.42 lakh crore.
- However, OMC valuations are currently trading at a 20-40% premium to historical valuations, adding pressure on future growth expectations.
Advantages of HPCL, BPCL, IOC Shares Amid Crude Oil Rebound
- Strong Year-to-Date Performance: Despite the recent dip, HPCL and BPCL have delivered robust returns (57% and 55%, respectively) in 2024, indicating strong investor confidence and financial health.
- Potential Buying Opportunity: For investors looking for long-term positions, the dip in OMC shares could provide an opportunity to buy at a lower price, especially if crude prices stabilize or fall.
- Increased Oil Margins Earlier in the Year: The marketing margins on retail fuels were previously high, cushioning OMCs against volatile crude prices. While this may not be sustainable, it has helped strengthen their financial position earlier in the year.
Disadvantages of HPCL, BPCL, IOC Shares Amid Crude Oil Rebound
- Short-term Volatility: The rising crude oil prices due to Middle East tensions could lead to higher operational costs for OMCs, which might result in lower profitability in the coming quarters.
- Unsustainable Margins: Analysts, such as those from JM Financial, caution that the current high marketing margins are unlikely to last, which could hurt OMC profitability if crude prices rise or refining margins continue to shrink.
- Overvaluation Concerns: OMC shares are currently trading at a 20-40% premium to their historical valuations. This overvaluation could lead to a market correction if the companies fail to meet high investor expectations.
Conclusion
The shares of HPCL, BPCL, and IOC have been affected by the rise in crude oil prices due to geopolitical tensions in the Middle East, reversing the gains made in 2024. While HPCL and BPCL have shown strong growth this year, concerns over refining margins and the sustainability of high marketing margins could present challenges in the near term. Investors should keep an eye on the crude oil market as it could significantly impact the performance of these OMCs in the coming months.
FAQs
- Why did HPCL, BPCL, and IOC shares fall on October 3?
The shares fell due to a rebound in crude oil prices amidst escalating tensions in the Middle East, which raised concerns about rising operational costs for OMCs. - How much have HPCL, BPCL, and IOC gained so far in 2024?
HPCL has gained 57%, BPCL 55%, and IOC 32% in 2024, despite the recent declines. - What are Gross Refining Margins (GRMs), and why are they important?
GRMs refer to the profit earned by refining crude oil into products like gasoline and diesel. Lower GRMs (as seen in September) indicate reduced profitability for OMCs. - What are the current crude oil prices, and how have they affected OMCs?
As of October 2, Brent crude was trading at $73.90 per barrel and WTI crude at $70.10 per barrel. The rising prices have increased the operational costs for OMCs, affecting their stock performance. - What is the outlook for OMC shares according to analysts?
Analysts from JM Financial have a cautious outlook on OMCs due to unsustainable marketing margins. They have recommended a ‘Sell’ rating on HPCL and IOC, and a ‘Hold’ rating on BPCL.
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