Nod to gas price hike gives energy boost to RIL, ONGC & GAIL

Written by fe Bureau | Mumbai | Updated: Jun 29 2013, 08:43am hrs
Energy producers Reliance industries (RIL) and ONGC led market gains on Friday after a government committee approved the doubling of natural gas prices starting next year. Analysts hailed the long-awaited move as a big positive for upstream producers, saying it would help boost earnings substantially starting FY15.

Stocks surged in response to the governments Thursday night decision, but gave up part of their gains towards close of trade. RIL ended the session up R31.4, or 3.8%, at R 861.85 while ONGC closed with gains of R9.55, or 3%, at R330.1.

GAIL was among the top gainers, picking up R14.2, or 4.8%, to close at R313. Oil India, however, forfeited all of its early morning gains and closed with a marginal decline of 0.4% at R570.8.

The broader markets also rallied with the benchmark indices closing nearly 3% higher. The 30-share Sensex closed at 19,95.81, adding 519.86 points, or 2.75% its biggest single-day gain in nearly 22 months.

The Cabinet Committee on Economic Affairs (CCEA) agreed to double the price of natural gas for all domestic producers from April 2014 based on the market-based pricing formula recommended by the Rangarajan committee in December 2012. This formula will mean that domestic gas prices will nearly double to $8.4 per mmBtu. The pricing would be applicable for five years with a review every quarter.

This is likely to also boost domestic gas production over the next 3-5 years by incentivising gas producers to invest in gas exploration and production in India and improving viability of many gas fields, which were otherwise not viable at the current low gas prices. We see positive impact on ONGC, Oil India and RIL, said Ambit Capital in a note.

ONGC and Oil India are seen to be among the biggest beneficiaries of the decision. Various analyst estimates indicate that ONGCs earnings in fiscal 2014-15 could rise anywhere between 20% and 40% while that of Oil India may increase by 12% to 40% depending on the extent of the price increase.

As per Nomura, every $1 per mmBtu increase in the price of natural gas may push up earnings of ONGC and Oil India by up to 9% in 2014-15. As a result, the near doubling of the natural gas price from the current $4.2 per mmBtu could mean a 40% increase in net profit.

However, given that nearly 90% of the APM (administrated price mechanism) production goes to highly price sensitive power and fertiliser sectors, the pass through of higher price may be difficult, says Nomura

Kotak Institutional Equities says that any potential increase in royalty on natural gas produced from nominated fields or higher subsidy burden may curtail the benefit to the upstream companies.

Although RIL is also expected to benefit, declining gas production from its KG-D6 block is seen limiting the potential for a pick-up in earnings till FY17. Experts see the companys FY15 earnings rising by 1% to 10% due to the price hike.

Even though higher natural gas prices is deemed negative for GAIL since it uses domestic gas for its petrochemical and LPG plants, analysts anticipate the government to reduce the subsidy burden of the company.