BackMarket-linked gas prices: timeline key
RIL, ONGC and Oil India will be key beneficiaries of Rangarajan Committee’s proposal on domestic gas prices
Premium(Amit Dave/Reuters)
The key beneficiaries of the Rangarajan Committee’s proposal to bring domestic gas prices in line with global gas prices would be Reliance Industries Ltd (RIL), Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd (OIL).
Shares of RIL and ONGC gained by 1.51% and 1.89%, respectively on Thursday, on a day the Nifty rose by 0.27%.
Analysts at JM Financial Research wrote in a note to clients, “Our back of the envelope calculations indicate a potential gas price of about $7 (around ₹ 380 today) per mmBtu (million British thermal units), based on the committee’s formula and FY12 gas prices. We note that while these prices may keep fluctuating in tandem with the global benchmark, the proposed price is at a significant premium to the current existing domestic benchmark price of $4.2 a mmBtu." Needless to say, earnings estimates for these companies will increase if the committee’s recommendations are accepted by the government.
Having said that, it needs to be noted that the timeline for the implementation of these recommendations is still very uncertain.
In the last fiscal year, RIL derived 3.8% of its total revenue from its exploration and production (E&P) business, or oil and gas business. While that does constitute some revenue from oil as well, most of it includes revenue from gas.
However, the problems at the KG D6 gas block have meant that contribution from the E&P business dropped to 2.1% in the September quarter. Analysts expect the share of gas revenue to rise from fiscal year 2014-15.
On the other hand, the contribution from gas to total revenue for ONGC and OIL stands at 20% and 10%, respectively. It’s important to note here that ONGC through its subsidiary ONGC Videsh Ltd has substantial global exposure and hence that portion of earnings would not be affected on account of an increase in domestic gas prices.
Analysts at JM Financial expect FY15 gas earnings for RIL, ONGC and OIL to increase by 8%, 25% and 32%, respectively. Other brokerage firms, too, expect earnings to improve.
In sum, while an increase in gas prices definitely augurs well, the timeline is the key. Moreover, ONGC and OIL investors would do well to keep a tab on whether the benefits that accrue as a result of this would not translate into higher subsidy sharing. As far as RIL is concerned, the stock has already appreciated by 27% from its lows in the last fiscal year to 860.55, and it’s unlikely that investors will get too excited about the prospect of free gas pricing until there’s something more concrete on the table.
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