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Deciphering Oil Marketing Companies' Q4: Goldman Sachs Offers Insights

Published 05/14/2024, 08:32 PM
© Reuters.
BPCL
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HPCL
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IOC
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Goldman Sachs (NYSE:GS) recently released a comprehensive analysis of Oil Marketing Companies' (OMCs) fourth-quarter results, highlighting a mixed performance across the board. While Indian Oil Corporation (NS:IOC) reported weaker-than-expected EBITDA, with a notable -24% variance compared to Bloomberg consensus, Hindustan Petroleum (NS:HPCL) Corporation Limited (HPCL) and Bharat Petroleum (NS:BPCL) Corporation Limited (BPCL) showed positive growth of +8% and +17% respectively.

IOC's earnings shortfall is attributed to higher inventory losses and a decline in petrochemical earnings. Overall, OMCs witnessed a decrease in core Gross Refining Margins (GRMs), averaging at $10.2/bbl, despite improvements in Singapore complex GRMs. This dip may be linked to a further decline in crude discounts, estimated at $3.2/bbl in the fourth quarter compared to $7.1/bbl in the previous nine months.

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Goldman Sachs maintains a cautious outlook for IOC, with core EBITDA estimates for FY25E/26E remaining significantly below Bloomberg consensus. The risk-reward ratio for IOC is deemed unattractive due to multiple factors including expected normalization of refining margins, potential downward pressure on marketing margins, and a lack of substantial growth catalysts.

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It has given a 12-month target of INR 110 per share, whereas InvestingPro’s complex valuation models are forecasting an estimated fair value of INR 152.7, a downside potential of 4.4%. If you look at ProTips - it tells that the net income is expected to drop this year which can also negatively affect the share price.

While acknowledging a more balanced risk-reward for HPCL and BPCL, Goldman Sachs suggests further downside risks for refining and marketing margins. The firm's EBITDA estimates for OMCs remain below Bloomberg consensus, factoring in normalized crude discounts and marketing margins amidst optimistic oil price projections.

In light of these insights, Goldman Sachs revises its earnings estimates and target prices for BPCL and HPCL (INR 605 and INR 460, respectively), reflecting adjustments in refining margin assumptions and commissioning timelines for upcoming refineries. Despite the upward revisions, the firm maintains a cautious stance, emphasizing the need for continued monitoring of market dynamics and operational performance.

Image Description: Key metrics of HPCL

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Image Description: Key metrics of BPCL

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InvestingPro is fiving a fair value of INR 432 per share foe HPCL and INR 593 per share for BPCL. While Goldman Sachs is bearish on all three OMCs, InvestingPro’s financial models are also depicting some downside potential.

Goldman Sachs reaffirms its Sell rating on IOC, citing concerns over pricing and margin expectations. The firm's recalibrated target prices reflect updated earnings projections and a forward-looking valuation methodology.

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