New Delhi: Oil marketing companies (OMCs) are expected to see a drop in operating profit to USD 12-14 per barrel in fiscal 2025 from USD 20 per barrel last fiscal, Crisil Ratings reported. The decline is primarily due to discounts on Russian crude oil, a softening of diesel spreads, and inventory losses, according to the market intelligence firm.
The report notes that stable retail fuel prices amid volatile oil prices will help support overall returns for the industry. Despite the decrease, the operating profit will still be higher than the USD 9-11 per barrel average over the past decade through fiscal 2024. This will partially support OMCs’ substantial capital expenditure (capex) requirements.
An analysis of public sector OMCs rated by CRISIL Ratings, covering 90 per cent of the sector, confirms this trend. OMCs earn through two main channels: refining and marketing. In refining, they earn a gross refining margin (GRM)–the difference between the value of refined products at the refinery gate (benchmarked to international prices) and the cost of crude oil used in production.
In marketing, they earn a margin on petrol, diesel, and other petroleum products sold. While oil prices declined by 11 per cent year-on-year to an average of USD 83 per barrel in fiscal 2024, inventory value fluctuations had a marginal impact on overall GRM, reported at USD 12 per barrel.
Core margins remained robust due to high diesel spreads, sustained by geopolitical uncertainties that disrupted global energy supply chains, keeping international prices elevated. Furthermore, stable retail fuel rates contributed to healthy marketing margins (net of operating expenses) of Rs 4 per litre or USD 8 per barrel, resulting in an overall profit of USD 20 per barrel for the year.
Aditya Jhaver, Director at CRISIL Ratings, commented, “GRMs are experiencing a sharp correction this fiscal and are likely to average USD 3-5 per barrel, with diesel spreads stabilising as refineries globally have ramped up production while consumption has slowed.
Additionally, discounts on Russian crude have reduced, and oil prices are projected to average USD 75 per barrel in the second half of the fiscal, down from USD 82 per barrel in the first half, leading to inventory losses. However, marketing margins (net of operating expenses) are expected to remain stable at Rs 4.5 per litre (or USD 9 per barrel), assuming no reduction in retail fuel prices.”
The resulting cumulative cash accrual, estimated at Rs 52,000-54,000 crore, will partly support the planned Rs 90,000 crore capex by OMCs. OMCs continue to invest in capex, primarily for brownfield capacity expansion. Around 80 per cent of the budgeted capex is allocated for meeting domestic demand for petroleum and petrochemical products, with the remainder directed towards product pipelines, marketing infrastructure, and green energy initiatives.
Joanne Gonsalves, Associate Director at CRISIL Ratings, noted, “While profits may moderate year-on-year, the industry is likely to maintain its capex, partly funded by debt. Consequently, the debt-to-Ebitda ratio of CRISIL-rated OMCs is projected to increase to 3 times in fiscal 2025 from 1.9 times in fiscal 2024. Nevertheless, the sector’s credit profiles will remain supported by its strategic importance and government ownership benefits.”
The market intelligence firm cautioned that significant volatility in crude oil prices, without corresponding adjustments for end-consumers, could pose downside risks to these expectations.