Steady growth in demand for petroleum products coupled with declining-yet-healthy gross refining margins (GRMs) and rising oil and gas production will help maintain the credit profile of oil marketing companies (OMCs) in FY25.

The agency has maintained a neutral outlook for the oil and gas sector for FY25, Bhanu Patni, Associate Director at India Ratings and Research (Ind-Ra) said on Wednesday.

“The agency expects credit profile of downstream companies to remain stable during the year, driven by a stable demand for petroleum products, declining-yet-healthy GRMs yielding healthy refining EBITDA and reduced crack spreads lowering marketing losses,” she added.

Patni pointed out that OMCs kept retail prices relatively stable despite the sharp movements in crude prices and spreads to ensure stability in margins, which has also led them to earn higher margins in some periods, compensating for lower margins/losses in others.

Brent futures eased from a six-month high above $91 per barrel in early April to around $83 as concerns about a wider Middle East conflict subsided and softer macro sentiment weighed on prices, International Energy Agency said in its oil market report for May 2024.

More refining capacity

Ind-Ra said that it expects India to add 24 million tonnes per annum (mtpa) of crude oil refining capacity in the next two years. At present, the refining capacity stands at almost 257 mt, or 5.02 million barrels per day (mb/d).

“The trend is likely to continue in FY25. Stable demand for petroleum products in India has led to expansion of refinery capacity. Total refinery capacity addition is expected at 24 MTPA by FY26. Ind-Ra expects OMCs’ debt to increase in FY25 to fund the planned capacity addition and modernisation. However, given the expectation on margins, Ind-Ra expects leverage position of OMCs to remain comfortable over FY25,” Patni said.

A senior official with a domestic refiner explained that growth in sales of automobiles, higher spending on road infrastructure and robust economic growth will further push up petrol and diesel sales. This coupled with exports would require more refining capacity.

Diesel and petrol accounts for around 54-55 per cent of the total petroleum products consumed in the country. India processed 5.24 mb/d of crude in FY24, compared to 5.11 mb/d and 4.85 mb/d in FY23 and FY22, respectively.

According to the Centre for High Technology (CHT), a technical wing of Ministry of Petroleum & Natural Gas (MoPNG), refining capacity is projected to increase by 56.6 MTPA by 2028. Of which, the world’s fourth largest refiner will add 84 per cent of capacity through brownfield expansion. It will add 9 MTPA through greenfield expansion.

Between 2014-2023, India added a total of 38.9 MTPA of refining capacity, of which 39 per cent was Greenfield and the remaining 61 per cent was brownfield, while during 2010-14, it added 29.7 MTPA capacity through brownfield expansion.

Upstream companies

The Ind-Ra analyst opined that upstream companies will continue to benefit from elevated crude oil prices. Oil prices continue to be impacted by the geopolitical conflicts and production cuts announced by OPEC+ countries.

“Ind-Ra expects the government of India to continue tweaking the special additional excise duty rates which have been applicable from July 1, 2022, to bring the net realisation level to $70-80 per barrel (break even cost of upstream companies is estimated at $40 a barrel). This coupled with an increase in production of crude and natural gas is expected to improve EBITDA for upstream oil and gas companies in India,” Patni added.

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