The recent rise in Brent crude oil prices, now above $80 per barrel, is poised to significantly impact the earnings and stocks of public sector undertakings (PSUs) in the oil and gas sector. Emkay Global, a leading brokerage, has identified the potential downside risks to the earnings of oil marketing companies (OMCs) such as Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL), and Indian Oil Corporation Ltd (IOCL).
The increase in crude oil prices has led to a reduction in petrol and diesel marketing margins for OMCs, with margins cooling down to ₹8 per litre and ₹2.5 per litre, respectively. Additionally, the depreciation of the Indian rupee by 2-3% during this period has further strained the OMCs' financials. Emkay Global anticipates that near-term volatility in oil prices could persist due to geopolitical uncertainties, OPEC+ production decisions, and fluctuating demand dynamics.
Despite these challenges, Emkay Global maintains a positive outlook on OMCs, assigning a "BUY" rating to HPCL, BPCL, and IOCL. BPCL is regarded as the fundamentally strongest company among the three, while HPCL's Vizag expansion and modernization project is expected to be fully completed by the end of FY25, potentially boosting gross refining margins (GRMs). IOCL, however, has underperformed compared to HPCL and BPCL recently and carries a higher inventory risk.
The rise in crude oil prices also benefits upstream stocks such as Oil & Natural Gas Corporation Ltd (ONGC) and Oil India. Emkay Global projects a 7-9% increase in ONGC's and Oil India's standalone earnings per share (EPS) for every $5 per barrel rise in crude oil prices on an annualized basis. Consequently, the brokerage maintains a "BUY" rating on both ONGC and Oil India.
In conclusion, while the surge in Brent crude oil prices presents challenges for OMCs, it also offers opportunities for upstream companies. The overall impact on PSU earnings and stocks will depend on the stability of oil prices and the broader macroeconomic environment.