Oil companies’ earning to remain weak despite government bailout: Moody’s

Despite the recent government bailout for the domestic oil companies, the refiners’ earnings are expected to remain weak in the fiscal year ending March 31, 2023 (fiscal 2023) because of significant losses incurred by these companies on sale of petrol and diesel during the first half of fiscal 2023, for which they have not received any compensation so far.

Moody’s Investors Service in its reports says that although the ₹220 billion grant is credit positive because it will provide support to earnings and cash flow for Indian refiners, but their earning will remain low. Earlier this month, the government had approved a one-time grant of ₹220 billion ($2.75 billion) to state-owned refining and marketing companies Indian Oil Corporation Limited (IOCL), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) to cover losses on sales of domestic liquefied petroleum gas (LPG) between June 2020–June 2022.

“We estimate that state-owned refining and marketing companies have lost around $6.5 billion to $7 billion in revenue on the sale of petrol and diesel from November 2021 to August 2022. We estimate IOCL’s revenue loss on petrol and diesel sales to be $3.0 billion-$3.2 billion, while revenue losses for BPCL and HPCL are estimated to be around $1.6 billion-$1.9 billion,” Moody’s said.

Recovery in demand following easing of movement restrictions and the onset of the Russia-Ukraine conflict has led to a significant increase in crude oil prices, which averaged around $104 a barrel (bbl) from January–August 2022 compared with around $80/bbl in November 2021.

Despite higher feedstock costs and an increase in international petrol and diesel prices, the selling prices of petrol and diesel in India, which account for almost 55% of total sales of petroleum products in the country, did not increase at the same pace, which resulted in losses for the state-owned refiners.

Barring a small increase of around ₹10/liter (around $20/bbl) between 22 March–6 April 2022, net realized prices for refiners have largely remained unchanged since November 2021.

While crude oil and international transportation fuel prices have decreased from the highs seen earlier in the year, they remain subject to the volatile industry environment and geopolitical developments. Any increase in crude oil or international product prices without a commensurate increase in net realized prices for the Indian refiners will further weaken their earnings and cash flow outlook.