What higher domestic gas prices mean for cos

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Indian domestic gas prices have been raised to a record $6.1/MMBtu (million metric British thermal units) for the half-year ending September 2022 (H1FY23) on a gross calorific value basis. This is a significant increase from the earlier price of 2.9/MMBtu for H2FY22.

Higher gas prices are positive for producers and negative for consumers of gas. Producers such as Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd benefit from higher revised prices. Also, the ceiling prices for gas from high-pressure, high-temperature fields have been raised by 62% to $9.92/MMBtu for H1FY23, which is expected to benefit Reliance Industries Ltd. “Gas price hike bodes well for ONGC, Oil India, and RIL, which account for the bulk of domestic gas production in India,” said analysts from IIFL Securities. The brokerage has thus upgraded ONGC, Oil India, and RIL’s FY23-24 estimated earnings per share by 18-21%, 14-15% and 8-11%, respectively.

The gas price hike comes at a time ONGC and Oil India find themselves in a sweet spot because of elevated crude oil prices, which boost price realizations for this segment. Unsurprisingly, shares of both companies have appreciated 18-19% so far in CY22.

Meanwhile, high gas prices lead to a rise in input costs for city gas distribution companies such as Indraprastha Gas (IGL) and Mahanagar Gas (MGL). However, they enjoy strong pricing power and that offers some cushion. Moreover, augmented petrol and diesel prices support the economics of compressed natural gas, which means that the latter would be cheaper despite price hikes. Even so, there is a risk of crude oil prices cooling. Jefferies India has modestly toned down its earnings estimates for IGL and MGL despite their ability to largely pass through higher administered pricing mechanism (APM) gas costs.

International gas prices are elevated and analysts reckon domestic prices are set to further rise in the upcoming revision because the APM gas formula is linked to global gas hub prices. “We expect domestic APM gas prices to increase further to about $10-11/MMBtu when prices are reset next in October unless the government were to tweak the formula to bring in a price cap,” said Aditya Bansal of Nomura Financial Advisory and Securities (India) in a report on 1 April.

As such, a sharp hike in gas prices could be detrimental to India’s gas demand. “Among the key gas-consuming sectors in India, power segment offtake is likely to reduce significantly as gas becomes relatively uneconomical at higher prices. Moreover, higher gas prices would lead to an increase in the government’s own outlay on fertilizer subsidy as the gas cost is reimbursed for keeping the fertilizer prices low,” the Nomura report pointed out.

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