For every $1/mmbtu gas price increase, profit for upstream cos will go up by 13-14%: Centrum Broking

APM gas prices will increase from tomorrow. From tomorrow, we will see a hike of around 60 to 70 percent, that is the expectation. It happens every six months, from April 2022 it is expected to increase by another 60 percent because of the surge that we have seen in global gas prices. Of course, it is a positive for gas producers, the likes of ONGC, Oil India, however, it is negative for the ones that are using it as input, so the likes of fertiliser companies, IGL, MGL and also the power companies which use gas could see some impact as far as the input costs are concerned.

According to Edelweiss, it is positive for ONGC, a hike of $1 per mmbtu will boost the profit before tax (PBT) by 14.50 percent on an annualised basis, but it also means that IGL and MGL will need to take 10 to 11 percent of price hikes, a lot of which they have already taken.

Jeffries has also put out a note, where they said that accounting for the price hike already taken, another 10 percent hike is required by IGL and Mahanagar Gas. However, the concern is for the price hikes that will come in from April 2022. Because if the current spike in international gas prices continue, domestic gas prices could touch as much as $9, that is in October of 2022. This could lead to a sharp reduction in EBITDA of all these user companies.

For Oil India, of course, there will be an increase in domestic gas realisation so Sharekhan expects it to increase to $3.8 per mmbtu, which is currently at around $2.5 per mmbtu. However, a lot of it is already priced in. Oil India is up 40 percent this month, ONGC up around 20 percent this month and both the stocks are still at reasonable valuations.

Probal Sen, senior VP at Centrum Broking, said, “The number that was mentioned about every dollar increase in average gas realisations has a 13 to 14 percent impact on profitability of both ONGC and Oil India, so obviously, I think we can probably make an educated guess on April 2022 prices. October will be based on June 21 to June 22 averages. So, I believe given that there are more than six months to go, things could change from here. But, clearly from April, on top of the almost dollar per mmbtu increase that we are likely to see from tomorrow, there could be another couple of dollars of increases. So yes, I mean upstream companies are clearly in a sweet spot irrespective of what is happening to their production numbers, just on the basis of pricing alone and you see that even crude has once again started to flare up. So, both these mean that earnings trajectory will be extremely high.”

He further added, “Despite whatever has happened to the stock, the fact is that ONGC is still just about 8.50 times one-year forward earnings, as per our basic earnings as I am talking standalone, so from that perspective, I would say there is definitely much more steam ahead as far as ONGC is concerned. Oil India, perhaps a little bit of the positive is already in the price. So I would much rather be adding more ONGC to my portfolio at these prices to play the price increase over the next 12 months.”

On city gas companies, Sen said, “I think at least for the October iteration, our sense is that the additional price increase required would be around Rs 3.50-Rs 4 for the domestic segments. If we go by past two years’ experience, any increase in domestic prices have been promptly passed on. Therefore, there is a decent chance that companies would pass it on straight away, depending on what the exact price is. We expect about $3.1 on an NVC basis to come through tomorrow. So, my sense is that they will pass it on.”

For the full interview, watch accompanying video.

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