SOE E&Ps will suffer while IGL, MGL and GAIL stand to gain; may see govt fixing APM price framework
India’s domestic natural gas prices are set to nearly halve to 10Y lows of $2/mmbtu over the next year. SOE E&Ps will suffer and users like IGL, MGL & GAIL will benefit but perhaps these pre-deregulation levels will prompt the govt. to fix the gas price framework that it instituted soon after it took office in 2014. ONGC & OINL, where $1 adds ~15% to EPS, would have the most to gain from such a miracle.
Prices: APM prices rose after NDA government assumed office to $5.6/mmbtu NCV from the $4.2 they were at between 2010 and 2014 when they were linked to Reliance’s KG-D6 price but have been soft since. They fell 12.5%, e.g., in the last half-yearly reset in Oct19 to $3.6. And yet, they are set to fall another ~45% over the next two resets in Apr20and Oct20 to 10Y lows of $2/mmbtu. Sharply lower EU prices on softer LNG are largely to blame but prices are subdued in gas surplus US, Canada & Russia too.
Impact: Natural gas users will obviously benefit. Power producers will become more competitive in the merit order despatch and fertiliser feed will become cheaper cutting govt. subsidies, with margin tailwinds for city gas distributors and Gail too. Indeed, the realignment of PMT prices may lift EPS by 6-10% from Q4FY20e for MGL, IGL & GUJGA with the likely 25% APM gas price cut in Apr to $2.7 a further Rs 2/scm tailwind for margins at IGL & MGL where it makes up 85% of volumes.
Margin: That would lift EPS by 20-25% for IGL & MGL, e.g., and by 13% for GUJGA unless it is passed on in an unlikely attempt to boost volumes. CNG prices could fall 8%, e.g., but do little to lift volumes when it is already 50% cheaper than petrol/diesel. Gail would benefit too with $-1 change in APM prices lifting EPS by 5-6% as LPG costs fall and a tad more for consol. EPS from lower costs at 70% owned BCPL.
SOE E&Ps: Conversely, ONGC & OINL will suffer with gas Ebitda likely to halve y-o-y in FY21e to their lowest levels since prices were first deregulated in May 2010. Such prices may do little to incentivise domestic production that has slipped to 4Y lows.
Voice: Yet, with E&P now mattering little to Reliance and prices at its new KG-D6 fields guided by a different formula, the strongest voice for reforming the broken APM price framework is probably lost. We await no miracles, therefore.
Miracle: Yet, should there be one, ONGC & OINL where we already bake in the lower prices for FY21-22e and where every $1 impacts EPS by 14-16% would gain the most. Irrespective, though, our BUY stays noting their 5-6x P/E and solid 7-8% yields.