While the more than 50% rally in crude oil prices from their recent lows in February might ruin the performance of domestic oil marketing companies (OMCs) in the quarters to come, the spectacular plunge in oil prices in FY16 – benchmark brent prices fell 28.14% in FY16 and traded at an average of $48.73 per barrel – saw OMCs post their best return on equity (RoE) ratio last year in almost a decade.
What also helped this performance were improved refining margins and deregulated retail prices. The gauge, which measures the return generated by a company by investing shareholders’ funds, for the three OMCs — IOC, BPCL and HPCL — stood at 21.3% in FY16 as compared to 10.9% last year.
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When it comes to refining margins, HPCL saw its double (Y-o-Y) in FY16 to $6.68 per barrel, while BPCL saw almost a similar jump – from $3.62 per barrel in FY15 to $6.59 per bbl in FY16. Refining margin refers to the earning from extracting fuels like petrol and diesel from crude oil.
Analysts claim low crude low oil prices also lowered the interest expense of OMCs as they ensured lower working capital requirements. Among the three OMCs, while HPCL boasted a record RoE of 31.5% in FY16, BPCL posted 31.6% and the largest of them IOC recorded an RoE of 15.5%.
Brokerage house Goldman Sachs observes that earnings of OMCs will continue to improve on the back of volume growth, higher marketing margins and capacity expansion. Painting a bullish future of the shares of the three OMCs, it noted, “We see average bull case upside potential of 51% vs. bear case downside risk average of -20%, all else being equal.”