The government on Friday notified a new natural gas pricing formula that will be almost double the rate of all domestically produced fuel to $8.2-8.4 per unit starting April 1. The new rates, which will change every quarter, will apply to all gas produced by both state run firms like ONGC and private companies like Reliance Industries (RIL).
As of 12:40 p.m., Oil India and ONGC were up 3.6 per cent and 2.6 per cent respectively while RIL rose 1.8 per cent. The BSE Oil & Gas benchmark rose around 2 per cent, outperforming the broader BSE Sensex, which traded with 1.3 per cent gains.
Reliance will benefit from the new gas prices for all its existing fields except the main Dhirubhai-1 and 3 (D1&D3) gas fields in KG-D6 block, where the company will have to submit bank guarantees to cover its liability if the charges of hoarding gas by deliberately producing less during last three years are proved.
RIL has reported a sharp decline in gas output from the D6 block, which accounts for around 80 per cent of the gas produced from the KG-D6 basin. The company has blamed geological complexities for the fall in output, but the oil regulator believes they failed to drill enough wells.
Prayesh Jain, AVP of research at IIFL, says RIL would not benefit much from this gas price hike. He said, "Its earnings could improve but it could have to part the incremental revenue as bank guarantee till the attribution is solved."
Global investment banks such as UBS and Bank of America Merrill Lynch, in separate notes, also said that RIL could see limited benefits due to bank guarantee conditions.
IIFL, however, has a buy rating on RIL. The new petrochemical and refining projects of RIL would add substantial value to the company and it is on the top of our buy list, Mr Jain said.
State-run producers like ONGC and Oil India will witness a positive impact of the price hike despite lack of clarity on 'net' benefit to these PSU companies, Mr Jain says.
The government is yet to clarify how gas would be priced for core sectors like power and fertiliser - factors that will impact PSU producers.
UBS said it would prefer ONGC as the best proxy to play the gas price hike while domestic brokerage Kotak said the move would significantly improve the profitability of Oil India and ONGC. BoAML sees ONGC-OIL's FY15 EPS (earnings per share) to go up by 38-48 per cent year-on-year due to the gas price hike.
The formula for new gas price is based on the 12-month average of global rates and LNG import price with a lag of one quarter. Barclays Equity Research estimates the price will be $8.3 per million British thermal unit in 2014-15 as against the current rate of $4.2. This will rise to $9.1 in the following year and then to $9.4 in 2016-17, it says. (With agency inputs)
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