Reliance Industries, ONGC and OIL India shares plunge on EC intervention in natural gas price hike case

Written by fe Bureau | Mumbai | Updated: Mar 26 2014, 17:33pm hrs
RILShares of upstream oil & gas companies RIL, ONGC and OIL India slid between 3% and 4% intraday..
Shares of upstream oil & gas companies Reliance Industries (RIL), ONGC and OIL India slid between 3% and 4% intraday on Tuesday after the Election Commission surprised analysts by asking the government on Monday to defer the natural gas price hike that was to be effective from April 1.

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The RIL scrip closed at R878.65 after posting its highest single-day fall in six months at 2.87%. The Oil India scrip ended 2.75% lower at R471.70, while ONGC shed 0.34% to end at R320.10 on the BSE.

In a late evening development on Monday, the Election Commission wrote to petroleum secretary Saurabh Chandra: ...after taking into account all relevant facts, including the fact that the matter is sub-judice in the Supreme Court, the commission has decided that the proposal (for gas price hike) may be deferred.

However, market observers expect gas prices to be hiked in the medium term. Surprisingly, the Election Commission has decided to defer implementation of higher gas prices due on April 1, leaving the decision to the new government after elections. While we see a downside to FY2015 estimates of ONGC, OIL and RIL, we maintain our view of higher domestic gas prices in the medium term market prices are necessary to attract new investment in E&P, said Kotak Institutional Equities analysts in a research note.

The guidelines for the price revision based on the Rangarajan formula was notified by the petroleum ministry on January 10, following the Cabinet approval of the formula for all producers, except Reliance Industries, in June last year and, subsequently, for RIL too in December. If the formula is applied at the current level of the benchmark prices proposed, it would lead to a near doubling of the domestic gas price from $4.2/million metric British thermal units now.

Experts feel while postponing the hike could have a near-term impact on upstream companies, state-owned players OIL India and ONGC would be affected the most. Given the fall in KG-D6 gas output over time, the impact on Reliance from lower gas prices is less significant we estimate a quarters delay cuts FY15 EPS by 2%, for example, Barclays analysts Somshankar Sinha and Pooja Gupta in a note.

The EPS impact we estimate 6% would be more pronounced for state-owned ONGC and Oil India, the analysts added. According to Morgan Stanley, the stocks will react negatively in the near term as the hike is likely to be delayed only by one quarter.

In year to date, the BSE Oil & Gas index has gained 3.76%. Shares of OIL India (-2.93%) and RIL (-1.8%) have declined during the same period, while ONGC has gained more than 10%. Experts remain bullish on ONGC and OIL India on account of attractive valuations.

We retain our overweight ratings, however, as we expect gas prices to rise in 2Q FY15 and maybe oil realisations in FY16E too, as retail under-recoveries fall. Valuations are also inexpensive at 6.5-7.5x FY15E P/E, Barclays analysts said in the report. We retain equalweight on RIL, they added.

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