(BS)
State-owned oil marketing companies are expected to register a healthy first quarter (Q1 2025-26) amid weak crude oil prices and improvement in refining margins, analysts say. Earnings in the period will also get a boost from lower LPG under recoveries due to an increase of Rs 50 per cylinder in domestic LPG prices by the government.
“Q1FY26 earnings will likely benefit from lower LPG under-recoveries due to a Rs 50 per cylinder domestic LPG price hike recently. The decline in propane prices as winter demand wanes provides an additional upside,” said Motilal Oswal, adding that Russian crude proportion for OMCs is expected to rise again in Q1FY26, supporting gross refining margins. Meanwhile, the marketing business earnings momentum of the OMCs has remained robust.
Elara Capital also expects the government to allow OMCs to earn above-historical integrated margin to fund their energy transition capex amid weak crude oil price environment.
International crude oil prices have fallen to $65 per barrel in Q1FY26, a $10/bbl decline against Q4FY25 level, which improved OMCs’ gross margin for gasoline and diesel by around Rs 3.5/liter despite the recent Rs 2/liter excise duty hike on gasoline and diesel.
Every $1/bbl drop in crude oil price improves the oil marketing companies’ gross margin for gasoline/diesel by Rs 0.55/liter, as per Elara. The firm expects crude oil prices in the current fiscal year to average at $70 per barrel.
“OMCs would also benefit from nil LPG losses in FY26E at current $65/bbl crude oil price versus Rs 250 billion (Rs 25,000 crore) cumulative LPG losses at our previous crude oil estimate of $75/bbl,” Elara Capital said.
Given the dip in crude oil prices below $70/bbl, Elara Capital expects FY26 integrated margin (EBITDA per unit of refining and marketing volume) of BPCL to jump by 49% versus FY25 level, to Rs 4,023 per tonne. For IOCL, it expects the integrated margin to increase 91% against FY25 level to Rs 4,000/tonne.
In April, the government increased excise duty on both petrol and diesel by Rs 2/litre. While the increase in excise duty will affect OMCs’ marketing margins, analysts do not expect any impact on the earnings as the current marketing margins are averaging above Rs 12/litre.
However, the earnings outlook for OMCs is clouded by expected inventory losses in Q1FY26 amid weak crude price environment against inventory gain in Q4FY25, risk of further excise duty hikes for petrol and diesel, which can crimp marketing margins, according to Motilal Oswal. Historically, OMCs have rarely made over Rs 8-10 per litre gross marketing margin on gasoline/diesel for more than two quarters.
For oil exploration companies like Oil and Natural Gas Corporation Ltd. and Oil India Ltd., lower oil prices could however, impact their revenue and affect crude price realisations.
“We forecast Brent to average $65/bbl in FY26 and FY27 but believe downside risks remain to both oil and gas realizations (for the upstream sector). Every $1/bbl decline in Brent prices leads to a 2% decline in FY26E/FY27E PAT (profit after tax) for both ONGC and OIL,” Motilal Oswal said.
