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Shares of oil and gas companies firmed up for the second day in a row on optimism that the Narendra Modi–led National Democratic Alliance (NDA) would form the new government at the Centre and push for needed reforms in this sector.
Market participants expect the new government to revise gas prices and bring clarity on the subsidy sharing mechanism. “While the 2014 policy decisions of monthly diesel price hikes and approval of a new gas price formula are positive, it is important that the new government not only continues these reforms but also removes other bottlenecks on the E&P (exploration and production) side,” said Harshad Borawake and Nitish Rathi of Motilal Oswal in a recent report.
“Ongoing reforms, in our view, will not only correct the anomalies of the last decade, leading to normalisation of the profitability of oil PSUs (public sector undertakings) but also reflect in their stock prices, supported by a range-bound oil price and rupee/dollar (ratio).”
Also fuelling the rally were expectations of a sharp increase in automobile fuel prices (diesel and petrol) after formation of a new government.
The S&P BSE oil and gas index, the largest gainer among sectoral ones, surged nearly 3.1 per cent as compared to a 2.4 per cent rise in the benchmark S&P BSE Sensex on Monday. The index has risen nearly seven per cent in the past two trading sessions, as against a 5.4 per cent rise in Sensex.
RIL shines
After surging nearly five per cent in intra-day deals to Rs 1,048, its highest since April 2011, Reliance Industries (RIL) finally settled three per cent higher at Rs 1,029. Thus far in 2014, it has rallied 17 per cent against a 10 per cent rise in the Sensex.
The company, along with British energy major BP Plc and Canadian explorer Niko, recently served an arbitration notice to the government over implementation of a new gas price with effect from April 1.
The markets seem to have given a thumbs-up to the development, with the company being seen as more assertive in getting the issue resolved.
The Mukesh Ambani–led company had served an earlier arbitration notice in November 2011 to the petroleum and natural gas ministry over the latter’s move to disallow some of the expenditure incurred in the KG–D6 gas field because of declining production.
Ambareesh Baliga, managing partner (global wealth management), Edelweiss Financial Services, says, “I feel the recent up-move in RIL has been due to the developments related to gas pricing. The recent developments have been in a twilight zone, where the current government can’t do much and the next government will have to address the issue sooner than later, since the company has already served an arbitration notice. Gas pricing will also have a rub-off effect on other stocks, such as Oil and Natural Gas Corporation.”
Adding: “Having said this, I feel the rally in the oil and gas stocks has been overdone, except in the case of RIL. Oil marketing companies have rallied ahead of their fundamentals. However, in case the policy scenario is on expected lines, there can be a bump-up in stock prices overall. I maintain a ‘Hold’ recommendation on RIL. It can appreciate to Rs 1,150–1,200 in the next two months.”
“Oil and gas stocks have been on an upswing in the hope of policy reforms by the next government. I feel these stocks have seen a good upside and the rally has been built on expectations. I feel RIL and HPCL (Hindustan Petroleum) still have more steam left. However, the rally seems to be getting over for stocks like Cairn India and Bharat Petroleum,” said Sunil Jain, vice president, equity research, at Nirmal Bang.
