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Shares of companies in the oil and gas sector gained as much as 10 per cent on an intra-day basis on Friday after the government’s decision to hike gas prices from April next year. Analysts said the gas price hike would be a positive for producing companies like Reliance Industries, Cairn India, ONGC and Oil India.
ONGC was up 10 per cent in intra-day trade, while Oil India rose nine per cent.
The BSE’s Oil & Gas index, a bellwether for the sector, ended the day with a gain of 3.37 per cent at the time of closing. Stocks in the sector were up significantly in the first half of the trading session, but tapered down during the latter half of the day. The BSE Sensex on Friday ended the day up 2.8 per cent or 520 points at 19,395, on the back of an appreciating currency.
“There was some amount of profit booking. Besides, all the stocks were up in the morning. However, post the early trading session frenzy, these stocks lost some momentum and were not large contributors to the broader market rally seen,” said Sonam H Udasi, head of research at IDBI Capital Market.
“The rise in these stocks is a short-term phenomenon, as the sentiment surrounding this sector has turned positive, post the announcement. But the increase in profits could be negated by higher subsidy burden,” said Bhavesh Chauhan, senior research analyst, oil & gas, Angel Broking.
The changes rung in by the government would mean gas prices would be doubled to $8.4/mBtu from April 1, 2014. Prices are to be subsequently revised every quarter, in line with the Rangarajan committee recommendation. This revision in pricing formula would be in place for five years, with a provision for linking prices to the market from 2017.
A report by Religare Institutional Research on the sector said the rise in prices would see increase in investment in exploration and development of domestic gas resources and could lead to increase in gas production. However, the report expressed concerns about the negative impact on demand from gas consumers.
“While the gas price hike is positive for upstream oil & gas (companies), it is a significant negative for gas users and could affect gas demand in the near term. A steep rise in gas price could negatively impact near-term gas demand as key anchor gas consumers – fertiliser and power sectors – would likely need subsidisation to be profitable and sustain operations. City gas distribution would also be negatively impacted with the CNG cost hike likely acting as a deterrent to demand growth,” said the Religare report authored by Nitin Tiwari and Ballabh Modani.
“(Finance Minister) Chidambaram’s announcement that cost to the power and fertiliser companies will be lower indicated that the positive impact of gas price rise could be partially offset by higher subsidy burden. Hence, ONGC and Oil India declined after this announcement. Reliance Industries remained in the green as it is one of the key beneficiaries of the gas price increase,” said Chauhan of Angel Broking.
Reliance Industries, which has been plagued by drop in gas production, gained as much as five per cent during intra-day trades. An IDBI Capital report on the sector authored by Sudeep Anand said the company’s profit after tax would rise Rs 2,500 crore, while its earnings per share could rise 10 per cent in FY15 as a result of the price increase.
