How IOC, BPCL and HPCL jointly lost Rs18,500 crore in Q1FY23

It has been a forgettable quarter for the downstream oil companies in India. Typically, the downstream companies refer to a combination of oil refiners and oil marketers. The oil drillers and extractors are the upstream oil producers. In India, the major downstream players in the oil sector are IOCL, BPCL and HPCL. Surprisingly, these 3 state owned refining and marketing companies reported a combined loss of Rs18,500 crore in Q1FY23. Despite strong GRMs, the negative margins in the marketing segment took its toll on numbers.

Let us talk about Indian Oil Corporation (IOCL) first. It is the largest state owned refiner but also has a strong marketing franchise and sells petrol and diesel through its own pumps. For the June 2022 quarter, IOCL reported net loss of Rs1,993 crore. While IOCL accounted for just about 10% of the total losses of the OMC companies, it was BPCL and HPCL which accounted for a massive 90% of these losses. The reason was that IOCL had reported gross refining margins of $31.8/bbl against street estimates of $24.2/bbl.

How did IOCL report lower losses compared to BPCL and HPCL. One reason is that IOCL is predominantly a refining company while HPCL and BPCL are predominantly marketing companies. Hence the negative impact of the marketing margins was limited for IOCL. However, it must also be noted that the benchmark Singapore GRM for Asian refining has fallen from $30/bbl to $5/bbl. So, going ahead, IOCL may not have these defences built into its earnings.

However, this would also mean that the marketing losses would come down sharply as the negative gap would now almost be eliminated. However, IOCL would gain less from here on as the main bread and butter for IOCL (which is the GRM flows) are likely to be in weak territory. Weak GRMs imply that the refining segment earnings would be weak. It remains to be seen how the oil inventories pan out, although it is expected that the inventory losses for the downstream companies could actually increase.

BPCL and HPCL – they saw all the pressure

Unlike IOCL, both BPCL and HPCL are predominantly marketing companies with a smaller portion of refining franchise. Hence, while they did gain from the higher gross refining margins and higher crude prices, they took the biggest hit on the negative market margins as they were selling petrol and diesel at less than the gate cost. This resulted in much larger losses reported by BPCL and HPCL and this trend could improve going ahead as the negative marketing margins could get squeezed with the GRMs falling by over 75%.

For the June 2022 quarter, BPCL reported net losses of Rs6,291 crore while HPCL reported a whopping net loss of Rs10,197 crore. In both the cases, the marketing segment was weak as crude prices continued to remain high. However, due to social and political considerations, prices of retail fuels like petrol and diesel remained unchanged throughout June quarter. Even as the petrol and diesel prices remained unchanged, the average Asian Brent Crude benchmark rate had gone up to $112/bbl as against just $98/bbl in the March 2022 quarter.

Due to this pricing anomaly, during the quarter, the OMCs were compelled to take a loss of Rs9 on each litre of petrol and Rs15 on every litre of diesel that these OMCs sold. In addition, there were forex losses as well as inventory losses due to excise duty cuts. But it was not just about the negative margins. In the case of HPCL, GRMs of its refining business came in at just $16.7/bbl against the street expectations of $22/bbl. In the case of BPCL, fortunately, the GRMs were in line with street expectations.