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Business News/ Market / Mark-to-market/  Gas price cut: the gainers and losers
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Gas price cut: the gainers and losers

With another round of price cuts likely in domestic gas and the crude oil environment largely muted, the outlook for ONGC and OIL will continue to be challenging

Earnings of gas producers such as Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd (OIL) will be adversely impacted. Photo: ReutersPremium
Earnings of gas producers such as Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd (OIL) will be adversely impacted. Photo: Reuters

Domestic gas prices have been cut again. This is the fourth consecutive cut since November 2014 (see chart). For October-March 2017, prices have declined 18% to $2.5 per million British thermal units (mmBtu) on gross calorific value basis. What is worse is that analysts expect another round of price cut in April 2017 when the next price change is due. So far, trends in regional benchmarks that determine domestic prices indicate another cut is likely.

So who wins, who loses when domestic gas prices are cut?

Earnings of gas producers such as Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd (OIL) will be adversely impacted. This comes at a time when ONGC and OIL’s crude oil price realizations are already under pressure due to the lower crude oil price environment.

According to Nomura Financial Advisory and Securities (India) Pvt. Ltd, for ONGC, the impact on revenue will be nearly Rs2,500 crore, with a post-tax impact of Rs2 a share (6.5% of its FY18 EPS of Rs31). For OIL, the impact on revenue would be nearly Rs350 crore, and a post-tax impact of Rs4 per share (7.5% of Nomura’s FY18 EPS of Rs52). EPS is earnings per share. Very low production from KG-D6 (D6 field in the Krishna-Godavari basin) means that the impact on Reliance Industries Ltd will be marginal.

On the other hand, GAIL (India) Ltd is expected to benefit from low gas prices. The company uses domestic gas for its LPG (liquefied petroleum gas) production. “Margins for the LPG business should expand by ~10% with this price reduction," said analysts from Religare Capital Markets in a report on 3 October. After a 20% domestic gas price cut on 1 April, GAIL’s operating costs fell sharply, 25% quarter-on-quarter in the June quarter for both LPG and gas transmission segments, said Nomura in a report on 30 September. Needless to say, another decline in prices will benefit GAIL further.

City gas distributors—Indraprastha Gas Ltd, Mahanagar Gas Ltd and Gujarat Gas Ltd—are expected to benefit too. The quantum of benefit, though, will depend on the extent of gain they decide to pass on to consumers in the form of retail price cuts.

Meanwhile, the government has also reduced the ceiling price for gas produced from new difficult fields by 20% to $5.3 per mmBtu. This hampers the investment outlook for domestic gas output. With another round of price cuts likely in domestic gas, as mentioned earlier, and the crude oil environment largely muted, the outlook for ONGC and OIL will continue to be challenging.

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ABOUT THE AUTHOR
Pallavi Pengonda
Pallavi is a deputy editor at Mint and heads the Mark to Market team. This column covers wide-ranging topics related to the stock markets, offering an in-depth analysis of financial reports of companies. She writes and edits across verticals, covering the breadth of the Indian stock market. Pallavi has done her master of management studies, specializing in finance.
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Published: 04 Oct 2016, 12:49 AM IST
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