Earnings of ONGC as well as OIL India expected to rise 5-9 per cent annually.
The government’s move to increase administered price mechanism (APM) gas price to $4.2 per million British thermal unit (mBtu) – at par with Reliance Industries’ KG-D6 gas price – could be a potential game changer in terms of oil & gas sector reforms.
Rating agency Icra believes more than 65 per cent of the market is already de-regulated in terms of prices and a controlled pricing regime for only a select set of consumers has been distorting consumers’ price expectations. Although the core issue of under-recoveries on fuels' retail sales remains, the hike in gas price means substantial gains for ONGC and OIL India. The move was good enough for the companies' stocks to rally eight-nine per cent after the Wednesday evening announcement.
| EARNINGS UPGRADED | ||||
| FY10 | FY11E | FY12E | FY13E | |
| Price ($/mmbtu) | ||||
| Previous | 1.8 | 1.8 | 1.8 | 1.8 |
| New | 1.8 | 3.5 | 3.8 | 3.8 |
| ONGC | ||||
| APM Gas Sales * | 50.0 | 50.0 | 50.0 | 51.0 |
| New EPS (Rs) | 95.5 | 122.9 | 122.6 | 109.2 |
| % chg | 1.4 | 9.4 | 8.0 | 4.4 |
| OIL INDIA | ||||
| APM Gas Sales * | 5.0 | 5.0 | 5.0 | 6.0 |
| New EPS (Rs) | 110.5 | 116.6 | 127.3 | 121.0 |
| % chg | 1.0 | 8.3 | 6.9 | 4.4 |
| GAIL | ||||
| New EPS (Rs) | 24.8 | 30.4 | 32.9 | 32.5 |
| % chg | - | 4.7 | 5.2 | 5.1 |
| E: Estimates % chg is over old earnings estimates * in mmscmd, which is million metric standard cubic metres per day Source: CLSA Asia-Pacific Markets | ||||
ONGC and OIL, which have been making losses in the last couple of years from the sale of APM gas produced in nomination blocks, will see their profitability and cash flows improve visibly, besides the burden of subsidies being partly lowered.
The impact on city gas distribution players like Indraprastha Gas will depend on how swiftly they pass the costs onto the end users. For other users like power and fertiliser sectors, the impact is unlikely to be significant, if any.
Blazing gains
In the long run, the move should induce companies like ONGC to produce more natural gas from legacy blocks that enjoy APM prices but are economically not feasible at the lower price of $1.8 an mBtu. With $3.8 an mBtu (adjusted for royalty) pricing that is expected to be valid up to March 2014, it should improve ONGC’s revenues by around Rs 6,000 crore annually. Oil India’s revenues are expected to be higher by Rs 450-800 crore annually.
The impact on net profits of the two companies will also be material. Regarding ONGC, Murali Krishnan, head of research, Ambit Capital, says: “The gas price hike will result in an incremental net profit of Rs 3,900 crore, implying an increase of 21 per cent (based on FY10 estimates).” This should add Rs 16-19 to ONGC’s estimated earnings per share (EPS) for 2010-11 and 2011-12. For Oil India, the incremental EPS addition for 2010-11 and 2011-12 will be in the range of Rs 13-14 and Rs 10-15, respectively.
Although the share prices of ONGC and OIL gained 8-9 per cent on Thursday, there is potential for a further upside of 8-12 per cent, considering the fair value of these companies, as estimated by analysts.
With the government allowing GAIL to charge marketing margins of Rs 200 per million standard cubic metre a day (mscmd), its earnings are estimated to rise by Rs 1.5-2 a share, considering the 45-50 mscmd of APM gas it sources from ONGC and OIL. Its stock was up 2.4 per cent on Thursday at Rs 442.25, and is not far from fair levels of Rs 470-480, as estimated by analysts.
There are gains for Petronet LNG, too, albeit in an indirect manner. The hike in gas prices will help narrow the gap between its imported LNG and gas produced domestically.
Impact on users
Indraprastha Gas (IGL), which sources around three-fourths of its gas from ONGC at administered prices, saw its stock fall 5.5 per cent on Thursday on concerns over the impact of the gas price hike. However, its stock could recover the lost ground soon.
In the last nine months, IGL has increased the selling price of CNG to Rs 21 a kg from Rs 19 a kg. To maintain the gross realisations of Rs 12.8 a kg, IGL will need to raise CNG price again to Rs 25.5 a kg — a 19-20 per cent increase, which the company is contemplating.
As a result of the hike in gas prices, analysts estimate the cost of power generation will increase by Rs 0.75-0.95 per kilo-watt hour for gas-based power plants. Among companies, Torrent Power has all its 1,700 Mw of capacity using gas as fuel. The company has about 18 per cent of its capacity on merchant basis, where the impact could be in terms of pressure on the margins.
However, most of the other companies, including NTPC, do not have much exposure to merchant sales, and they will be able to pass on the hike to the end consumers.
Likewise, the impact for fertiliser companies will not be much as they will be compensated for the hike in input costs by the government. However, the companies could see some pressure on their working capital, which is expected to increase.
With inputs from Jitendra Kumar Gupta
