Record gas price hike: Huge gains for ONGC, RIL, but CGD firms’ margins to shrink

The profitability of upstream oil and gas companies Oil and Natural Gas Corporation (ONGC), Oil India and Reliance Industries (RIL) is seen rising in FY23 on the back of a 110% hike in domestic natural gas price to $6.1/mmBtu, said analysts. However, the margins of city gas distribution (CGD) companies – Indraprasth Gas, Mahanagar Gas and Gujarat Gas – would contract despite CNG and PNG being still more competitive to petrol, diesel and LPG.

Analysts at Morgan Stanley predict an increase of $3 billion in the earnings of ONGC in FY23 and $1.5 billion for Reliance Industries as they will benefit from higher gas prices and increased production from their upcoming projects in difficult terrains that have even higher rates. “According to our estimate every $1/mmbtu change in gas price affects ONGC’s earnings by around 5-8%. We foresee a $3-billion earnings increase in F23 and, more importantly, improving return on capital employed (ROCE) to above 20% after more than a decade,” Morgan Stanley analysts said.

The gas prices for difficult fields have risen by $3.8/mmBtu to $9.92/mmbtu and will be applicable to ONGC’s production from KG 98/2 block. Analysts expect the block will contribute around 14% to the total domestic gas production by FY24.

Reliance Industries gas production from a challenging and difficult field in KG-D6 is expected to rise to 27-28 mmscmd by FY24 from 18 mmscmd at present.

IIFL in a note said that higher realisation for difficult fields will encourage RIL and ONGC to fast-track their deep-water production schedules. “Given the companies account for the bulk of domestic gas production in India, we upgrade ONGC/OIL/RIL’s FY23-24 EPS by 18-21%/14- 15%/ 8-11%, respectively,” it said. The brokerage noted that despite the price reset, domestic gas prices are lower than landed LNG prices by 45-50%. The differential is even more significant versus spot prices, ranging at 70-80%. “Political will (would) be tested in H2FY23, when a similar price raise is expected,” the IIFL note said.

On the contrary, the margins of CGD companies such as Indraprasth Gas, Mahanagar Gas and Gujarat Gas are expected to be negatively impacted as they will have to pass on the burden of higher cost of gas.

Hetal Gandhi, director at Crisil Ratings, said: “Margins of CGD entities will be impacted significantly, contracting by around 300 baisis points in FY23.”

Swarnendu Bhushan, oil analyst at Motilal Oswal Securiteis, said CNG prices can go up by Rs 4 per kg with every dollar increase in price of APM gas and Rs 3/scm for piped natural gas.

Now that the APM gas price has gone up by $3.2/mmBtu, it would roughly translate to Rs 12.8 per kg increase in price of CNG. Piped natural gas prices can also see an increase by Rs 9/scm.