OMCs May Post Subdued Refining Margins in FY26

SEATTLE (Oil Monster): State-owned oil marketing companies are likely to register subdued gross refining margins during the upcoming financial year 2025-26 on account of a slowness in global consumer and industrial demand, especially in China, and additional supply flowing from refinery capacity additions seen globally, according to analysts. However, demand for petroleum products in the country is expected to remain robust during FY26 with bulk demand coming from diesel, petrol and LPG, resulting in healthy marketing margins.

As per India Ratings, the credit profile of downstream companies is likely to remain stable during the year, driven by a healthy demand for petroleum products and healthy marketing margins that would offset compressed gross refining margins (GRMs), yielding healthy overall EBITDA. 

 The agency expects EBITDA for standalone petrochemical (petchem) players and petchem EBITDA for integrated refiners to improve in FY26 compared to the lows seen during FY24. “Petchem EBITDA started improving during FY25, after remaining under pressure during FY24, on account of an improvement in the spreads for petrochemical products,” it said.

During the first half of FY25, EBITDA for integrated OMCs was supported by healthy marketing margins on the back of declining crude oil prices, subdued crack spreads, and stable retail prices. 

“Indian oil and gas demand is expected to remain strong in FY26, leading to an expansion in the refinery and petrochemical capacities. India’s refinery capacity is expected to increase by 22% in the next two-three years. Ind-Ra expects the strong demand to be driving oil and gas investments decisions in India,” said Bhanu Patni, Associate Director, Corporates, Ind-Ra.

While downstream companies are expected to yield healthy overall EBITDA, the country’s upstream companies may see a fall in EBITDA generation with a moderation in oil prices and a reduction in production from legacy fields. However, the impact of low crude oil price is expected to be offset by the removal of special excise on the production of crude and an increase in production expected from new discoveries, India Ratings said.

“Upstream companies will continue to earn healthy margins, despite the current decline in crude oil prices, as they would remain above $65 per barrel. This would keep sufficient cushion in margin, with estimated break-even cost of production at $40-45/bbl, leaving an EBITDA of $20-30/bbl,” the agency said. 

Oil prices averaged $78.7/bbl during Q2FY25 and declined to $75.2/bbl during October and $73.02/bbl during November. Analysts see crude prices to remain dependent on global geopolitical developments, including demand pickup and production targets announced by the Organisation of Petroleum Exporting Countries. “However, for domestic producers, India Ratings expects some relief from the impact of decline in oil prices on account of the removal of windfall profit tax on crude,” it said.

For the country’s city gas distribution (CGD) sector, the agency expects return on invested capital to moderate, however it would remain healthy. However, new geographical areas could see some pressure on capex execution as internal accruals for funding capex may come down. 

“Performance of standalone petrochemical players may improve during FY26 as they benefit from an improvement in the crack spreads and easing of the oversupply situation created due to the rampant capacity addition during FY19-FY24, especially in China,” the report said.

The government had earlier announced a reduction in the overall share of domestic gas allocation to CGD companies. The demand increase in the CGD segment coupled with the declining production of administered price mechanism (APM) gas has led to the decline in the priority allocation of APM gas to the CGD sector especially for CNG. 

Analysts see the reduced allocation will expose the players in the sector to the risk of managing long-term supply contracts. “CGD companies on a blended basis earn an EBITDA margin of Rs 7-10 per scm, which could reduce by Rs 3.0-4.0/scm depending on their volume mix post the reduction in allocation of domestic gas for CGD sector,” India Ratings said.

 Courtesy: www.financialexpress.com