Fuel demand rebound to drive earnings of oil firms: Moody's
Stable earnings from the marketing operations have helped to offset the refinery segment's weak performance over the last 12-18 months
Moody’s Investors Service on Wednesday said earnings for state-owned oil firms IOC, BPCL and HPCL will grow over the next 12-18 months as a gradual easing of pandemic restrictions drives a rebound in economic activity and fuel demand.
While earnings stability of marketing operations will help to offset low refining margins, rising fuel demand will in turn increase refinery throughout.
Demand for petroleum products in India declined substantially in April and May 2020 following a nationwide lockdown to control the spread of coronavirus. This led to a drop in capacity utilisation for most refiners in the fiscal year that ended on March 31 (FY21).
“However, the impact on demand for petroleum products following the second wave has been a lot more muted as the lockdowns were more regional in nature,” Moody’s said. Rebound in fuel demand and gradual recovery in refining margins will drive earnings improvement.
Moody’s give positive outlook for major oil companies
“Earnings for the three rated refining and marketing companies in India – Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) will grow over the next 12-18 months as a gradual easing of pandemic restrictions drives a rebound in economic activity and fuel demand,” it said.
Stating that earnings stability of marketing operations will help to offset low refining margins, the rating agency said this primarily because of the oligopolistic structure of the fuel retailing industry in India where IOC, BPCL and HPCL together control 90% of the fuel retailing network.
“Stable earnings from the marketing operations have helped to offset the refinery segment’s weak performance over the last 12-18 months, such that the impact on Indian refining companies’ overall earnings has been limited”, It added.
“The marketing business will remain a substantial earnings contributor for the Indian companies because of their large-scale fuel retailing network and entrenched market positions,” it said.
Moody’s said capital spending by the three refiners will remain high on strong demand for petroleum products and government efforts to boost investment spending to support economic growth.
Meanwhile, dividends will remain similar to historical levels, in line with Department of Investment and Public Asset Management (DIPAM) guidelines.
At the same time, all three companies are ultimately owned by the government, which ensures a stable industry environment without any severe competition.