The government of India has approved a hike in the administered pricing mechanism (APM) gas price sold by Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd (OIL) from nomination blocks from Rs3.20 per standard cu. m (scm) to Rs6.82 per scm. Prices are now at $4.2 per million British thermal unit (mmBtu) (pre-royalty adjusted) from $1.9 per mmBtu earlier. After the hike, APM prices are now in line with empowered group of ministers-determined gas prices for the Krishna-Godavari (KG) D6. APM gas prices were last revised in 2005.
The move follows the finance ministry’s suggestion of bringing about pricing parity between APM and KG gas in one swift move, rather than a phased increase in the APM gas prices as was proposed by the petroleum ministry. The prices will be effective until March 2014.
In a related development, the cabinet has also approved the marketing margins of $0.112 per mmBtu (Rs200 per scm) for GAIL India Ltd on APM gas marketing volumes. Previous to this, GAIL did not receive any marketing margin on sales of APM gas.
We expect ONGC to gain around Rs6,086 crore on the revenue front and Rs4,047 crore on the profit front during FY12, thus translating into an earnings per share (EPS) gain of Rs18.90 per share. However, as we were building around a 15% increase in APM gas prices over FY10-12, our revenue and profit for the company stands increased by Rs5,039 crore and Rs3,351 crore for FY12. Thus, we expect an EPS accretion of Rs15.70 per share on account of the gas price increase to Rs6.80 per scm.
We expect OIL to gain around Rs941 crore on the revenue front and Rs622 crore on the profit front during FY12, thus translating into an EPS gain of Rs25.90 per share. Given the fact that OIL’s net gas realizations were lower than that of ONGC’s APM realization, it stands to benefit more on account of the increase in the gas prices to $4.2 per mmBtu.
GAIL uses gas for its petrochemical and liquefied petroleum gas (LPG) operations; however, as it was not procuring APM gas, the company is not likely to be affected by the gas price hike. Yet, we believe that the levy of marketing margins on the APM gas increased GAIL’s revenue and profitability. According to our calculations, GAIL benefits by around Rs344 crore on the revenue front and Rs239 crore on the profit front, which translates into an EPS increase of Rs1.90 per share.
We believe that the move is a step towards a uniform gas pricing policy in the country, which is likely to improve the competitiveness of imported liquefied natural gas. This move could also encourage state-owned gas producers to develop marginal gas fields, which could increase domestic gas production, and benefit gas transportation companies such as GAIL and Gujarat State Petronet Ltd, apart from the producers of the gas.
On the negative side, city gas distribution companies, Indraprastha Gas Ltd and Mahanagar Gas Ltd, would be adversely affected on account of the gas price hike, as a large part of their supplies are at APM gas prices. We believe that given the huge gross margins reported by these companies on account of the benefit of cheaper APM gas in the past, it would be difficult for these companies to maintain their margins. Moreover, given the natural gas in piped natural gas (PNG) prices, on account of subsidized domestic LPG prices, these companies are bound to face pressures in the PNG segment.