Jefferies backs rally in oil marketing stocks despite margin declines

With a Goldilocks outlook and the expectation of OMC multiples returning to past peaks, BPCL offers the greatest margin of safety. It upgraded BPCL to Buy and increased its target price to Rs 890 a share.

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Jefferies has corrected its apprehension in the 90-130 percent rally in shares of oil marketing companies since October and regained confidence in the OMC stocks on the back of stable prices and government restraint.

The brokerage was worried about potential government intervention in retail fuel prices in the run-up to the elections. But now, more confident about the strength in the sector, Jefferies appeared optimistic about normative marketing margins in FY25.

Jefferies said the Red Sea disturbances boosted refining margins, and the diesel marketing loss may be temporary, with potential post-election price hikes. With a Goldilocks outlook and the expectation of OMC multiples returning to past peaks, BPCL offers the greatest margin of safety. It upgraded BPCL to ‘buy’ and raised its target price to Rs 890 a share, while it maintained a ‘hold’ on Indian Oil with a price target of Rs 215 and ‘underperform’ rating on HPCL and a price target of Rs 550.

Despite geopolitical events in the Middle East and militancy in the Red Sea, crude oil prices have stayed within the $75-85 range since November, even though the Red Sea disruption affects around 10 percent of global crude shipments. A significant oil price increase in CY2024 seems unlikely unless OPEC+ shifts from voluntary to compulsory production cut adherence, Jefferies said in a note.

The Red Sea route, through which 14 percent of global refined product supplies are shipped, has experienced a 50 percent decrease in tanker transit since December. This has led to longer shipping times, delayed supplies, and a 40 percent surge in diesel spreads since December. The forward curve indicates that diesel spreads could remain elevated into 1QFY25, it added.

Gasoline/diesel marketing margins have dropped significantly from around Rs 10 and Rs 3.5 per litre in December to Rs 5.5/1.3 per litre. Diesel crack strength has led to a negative spot marketing margin of Rs (-) 1.5 a litre.

While HPCL’s EBITDA will be impacted due to an adverse refining-marketing ratio, BPCL and IOCL are expected to face lower impacts in FY25 if refining strength persists. OMCs might be permitted to raise retail prices after the May elections to counter the negative impact, it said.

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