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Expect spurt in global gas prices to be temporary; prefer ONGC, Oil India, IGL: JM Financial

energy | Oct 1, 2021 11:25 AM IST

Expect spurt in global gas prices to be temporary; prefer ONGC, Oil India, IGL: JM Financial


Government increases the domestic gas price by 62 percent to $2.90 per unit for the October to March period. They have also hiked the ceiling for difficult gas fields by 85 percent to $6.13 per unit.

The government, on Thursday, announced a 62 percent hike in the price of natural gas, which is used to produce electricity, make fertilisers, and is turned into CNG to use as fuel in automobiles and cooking gas for household kitchens. This is the first hike since April 2019 when the price was at $1.79 per mmbtu. The revision in prices comes on back of firming benchmark international prices but does not reflect the spurt in spot or current price of liquefied natural gas (LNG) witnessed during the last couple of weeks.

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The hike comes as a positive for gas producers like Oil and Natural Gas Corporation (ONGC) and Oil India Limited, however, it may prove to be negative for gas distribution (CGD) companies like IGL and MGL and also power companies that use gas as an input as the revision could mean higher input costs.
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CNBC-TV18 spoke to GAIL, where they said the price hike will impact the LPG realisations, but they will largely pass it on in this particular reset. It would increase the revenue for the company by 6 to 8 percent, but they expect their margins to remain stable. However, going forward, they said it may not be entirely possible to pass on all the gas price hikes.
For the city gas distribution companies, they have partly increased their prices but they also need to increase it by 10 percent more in order to maintain the margins at current levels.
Some of the brokerages have also written on this particular gas price hike.
Nomura says it is negative for users like GAIL, positive for upstream companies, city gas distribution companies are likely to pass on the cost rise.
Macquarie has said that they are concerned about city gas distribution companies and they see peak margin, peak valuations and high-cost inflation risk for these companies. Fundamentally, they like GAIL and tactically they are positive on ONGC.
But do remember from April 2022, there is an expectation of another steep hike.
Dayanand Mittal, oil and gas research analyst, JM Financial Institutional Securities, said, “If you look at CNG price, that is almost like 70 percent competitive or cheaper versus petrol, while vis-à-vis diesel, CNG is 55 percent cheaper. Post this hike from October 1, CNG companies will be required to increase prices by about 10-12 percent. So, 65-70 percent cost competitiveness will come down to more like 55 to 60 percent, which is very strong to ensure CNG conversions continue.”
He added, “Our historical precedent suggests anything about 30 percent cost competitiveness is the biggest incentive for users to convert to CNG. Mostly, CNG companies will pass it on at one shot. Maybe they might try to do it over couple of months but they will pass it on entirely in a month or two months’ time. So, it should not be a big concern. Yes, I agree the price hike might happen from April 22 onwards, that will be a very steep hike based on the global gas prices prevailing currently. So that could be a bit of a concern for CGD companies because that would mean the CNG price could potentially go up by 50-60 percent, which could significantly hurt the competitiveness.”
Mittal further said, “But we all know this current spurt in gas prices globally is a temporary phenomenon because of shortages and hence we continue to like CGD companies, IGL to start with despite some near-term risk to earnings. We prefer ONGC, Oil India definitely, they are the biggest beneficiaries of rising gas price. GAIL, I prefer probably lower in the pecking order because they don't benefit as much as ONGC does from a higher gas and oil price.”
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