We expect domestic gas price to be cut to $2.7/mmbtu on NCV basis from $3.4 currently when new gas price for next 6 months starting 1st October is announced soon. ONGC/Oil India’s earnings would be negatively impacted while GAIL would benefit. The key to watch out for would be the price cut taken by CGD companies—last time their margins had expanded post gas price cut. Even if crude price recovers, domestic gas prices are likely to remain low for sometime.
Expect new domestic gas price at $2.7/mmbtu (NCV) vs $3.36 earlier
The new domestic gas price which will be effective for the next 6 months starting 1st October, 2016 will be announced soon. Based on the formula, we expect the new gas price to be $2.45/mmbtu on GCV (Gross Calorific Value) basis (i.e. $2.7/mmbtu on NCV or Net Calorific Value basis) vs.
$3.06/mmbtu ($3.4/mmbtu NCV) currently. The government will also announce the ceiling price for gas produced from new deep-water, ultra deepwater and high pressure-high temperature discoveries. Based on our calculation this is also likely to decline to $5/mmbtu on GCV basis ($5.5/mmbtu NCV) from $6.6
Upstream to lose; downstream to benefit
In our coverage, the earnings of state owned upstream companies ONGC (ONGC IN, Buy) and Oil India (OINL IN, Hold) will be the most adversely impacted by the lower gas price. Due to low volumes from KG-D6 currently, negative impact on earnings of Reliance (RIL IN, Hold) will be relatively small. GAIL (GAIL IN, Hold), which uses domestic gas for its LPG production will benefit. The key to watch out will be the CGD (City Gas Distribution) companies —Indraprastha Gas (IGL IN, Buy) and Mahanagar Gas (MAHGL IN, Buy) will need to cut retail CNG prices by R2.4/kg and R2/kg respectively in our estimate in order to fully pass on the benefit to customers — though in April, they had cut prices by much less than what was required and had benefited from margin expansion as a result.
Another gas price cut likely in April-17 based on the formula
The next domestic gas price change, due in April-17, will be based on hub prices (Henry Hub-42%, NBP-30%, Canada’s Alberta Hub-6% and Russian price-23%) for the Jan-16 to Dec-16 period. Based on data available till September, a further cut in domestic gas price seems likely at that time due to lower NBP prices.