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Oil and gas stocks are on fire today on reports that the government could soon be taking a decision on the gas price hike issue in the next few weeks. The S&P BSE Oil & Gas index surged nearly 3.3% in intra-day deals and outperformed the benchmark indices – the S&P BSE Sensex and the CNX Nifty that gained 0.5% each.
Originally, the gas prices hike based on the formula suggested by C Rangarajan panel was set to be effective starting April 1, 2014. However, the matter got delayed due to the general elections. If implemented, the gas prices could double from the existing $4.2 per million British thermal unit to over $8, as suggested by the Rangarajan panel.
Reports now suggest that the petroleum ministry is expected to make a presentation on the issues pertaining to the oil and gas sector to Prime Minister Narendra Modi in next few days and a clear direction on the road ahead will be clear post that.
Among individual stocks, ONGC, which is one of the key beneficiaries of the hike in gas prices, rallied over 6% and made a fresh 52-week high of Rs 459.75. Oil India, Gail India, Indian Oil Corporation Limited (IOCL), Reliance Industries (RIL), Bharat Petroleum Corporation Limited (BPCL), Petronet LNG and Hindustan Petroleum Corporation Limited (HPCL) moved up between 1 – 5% in intra-day deals.
STOCK STRATEGY
Given the sharp rally in these stocks in anticipation of implementation of the new gas price formula, is there scope for a further upside? And, which ones should you buy then?
Harshad Borawake, an analyst tracking the sector with Motilal Oswal Research maintains a buy rating on ONGC, BPCL and IOC in a recent report, while maintaining a neutral rating for RIL.
“We expect the next big earnings growth only in FY17/18, when RIL’s large projects (petcoke gasification/off-gas cracker) commission. Near-term earnings are likely to be driven by gas price hike in FY15 and Polyester expansion,” he said.
As regards ONGC, likely increase in net realisation due to lower subsidy driven by continued diesel price hikes; significant beneficiary of scheduled gas price hike in FY15 and attractive valuations are the key positives according to analysts.
Borawake has modelled gas price of $6.3/mmbtu from FY15 versus likely new gas price of $8.4/mmbtu, to factor in likely subsidy towards power/fertiliser sector. However, if the full gas price benefit is passed to Oil India, then FY15E EPS will further increase by 16%, he says.
Analysts at Barclays point out that though ONGC’s domestic production may recover only in FY15, higher gas prices and oil realisations may matter more for FY15-17E EPS (earnings per share).
“ONGC should benefit from the recent price hike decision even if the government takes certain offsetting measures, in our view. Lower FY15 subsidy risk should also help. Valuation looks attractive relative to peers and its own history,” said Somshankar Sinha, an analyst with Barclays Research.
Adds Dhaval Joshi, an analyst with Emkay Global: “Oil marketing companies (OMCs) reported a healthy performance in FY14. An improvement in GRM (gross refining margins) on sequential basis supported higher profit during Q4FY14. Overall, the debt position on y-o-y basis also improved. We continue to maintain our positive stance on OMC's on pricing reforms. Moreover, any solution to the subsidy sharing mechanism would be big positive. We maintain Buy on BPCL and HPCL and accumulate rating on IOCL.”
