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Major natural gas players likely to hike CNG, PNG prices ahead. Which stocks to buy?

The hike comes as reports have stated that the Kirit Parikh panel sought more time in finishing the report for the pricing of natural gas. (Photo: HT)Premium
The hike comes as reports have stated that the Kirit Parikh panel sought more time in finishing the report for the pricing of natural gas. (Photo: HT)

  • While the rise in gas price is a positive for oil majors like ONGC and Oil India but would be a drawback for one of the leading CNG and PNG supplier Indraprastha Gas. The prices of CNG and domestic PNG are expected to get costlier ahead.

The Centre has hiked natural gas prices by a sharp 40% to $8.57 per million British thermal units (mmbtu) for the second half of FY23 (H2) from previous $6.1 per mmbtu. Also, the deepwater ceiling has been increased by 26% to $12.46 per mmbtu from earlier $9.92 per mmbtu in H1FY23. The hike comes as reports have stated that the Kirit Parikh panel sought more time in finishing the report for the pricing of natural gas. While the rise in gas price is a positive for oil majors like ONGC and Oil India but would be a drawback for one of the leading CNG and PNG supplier Indraprastha Gas. The prices of CNG and domestic PNG are expected to get costlier ahead.

Sabri Hazarika and Harsh Maru analysts at Emkay Global in their report dated October 2, said, "the increase came as a surprise, as we were of the belief that pending the Kirit Parikh panel’s recommendations, there could have been a status quo amid sustained inflationary pressures, windfall taxes on upstream and CNG players highlighting cost challenges."

In the report, the duo added, the natural gas price hike was also sizably below their estimate of $9.3 (ceiling was in-line), thus giving rise to doubt about the actual formula being used, though Russian local gas price is unknown. This may be transitory, with the Parikh panel developing a new formula.

"The increase in gas price, although a surprise, is commendable in terms of policy continuity in an adverse macroeconomic environment. The miss, however, is notable, as the benchmark for US-Canada averaged at $5/mmbtu and for Europe at $23-24/mmbtu during Jul ’21-Jun ’22, with their total volume share being ~80% in the mix. Hence, more clarity on the calculation is awaited this time round. The gas price rise could also have bearing on the Parikh panel’s recommendation and we believe $5-6/mmbtu could be a long-term floor (which we have built) in a $60- 70/bbl crude pricing scenario."

Which stocks to buy amidst natural gas price hikes?

The Emkay analysts have maintained their estimates for ONGC and Oil India.

On ONGC and Oil India, the report said, "we build-in USD6.1/mmbtu for FY23-24 and $5/mmbtu for FY25 & beyond. This also covers any downside risks associated with the Parikh panel’s formula. If the $8.57 price upholds till end-FY23, our FY23 EPS would revise upwards by 10% (Standalone)/11% (Consolidated) to 33.6/65.1. Based on the current run-rate, H1FY24 prices could cross $11/mmbtu. If the same is assumed, then FY24E EPS goes up by 45%/47% to Rs35.8/76.6 per share."

Thereby, the analysts note added, "With significant earnings resilience (as windfall oil tax is also adjusted accordingly), upstream remains well placed; we reiterate our Buy rating on ONGC and Oil India, with Rs190 and 260 TP respectively."

In regards to GAIL which consumes 3.2mmscmd of domestic gas for LPG production and pipeline internal consumption, the report said, "the hike would have an annual EBITDA/EPS impact of Rs10.5bn/Rs1.2, contingent on the prevailing LPG and pipeline tariff pass-through."

Further, in the report, the analysts added, "While October’s counter-seasonal cut in Aramco propane prices is a negative for GAIL, given risks of the FY23 earnings downgrade, we have a Buy on the stock (TP at Rs120/sh), with the broader outlook dependent on oil prices (Brent assumption of $100/85/75 for FY23/24/25+) and any potential development on the tariff front."

Emkay analysts expect CGD prices (CNG, domestic PNG) to rise in the near term.

"CGD (CNG, domestic PNG), which saw major respite from additional domestic gas allocation in mid-August and cooling down of the retail pricing & margin scenario, would again see cost pressures till the Parikh panel sets gas prices," the analysts' note said.

As per Emkay's calculations, Indraprastha Gas (IGL) may require to take an Rs10/kg hike in Delhi CNG prices, while peers may need to raise prices even more. at a more reasonable level.

Currently, players like Adani Total Gas, Central U.P. Gas (CUGL), and Maharashtra Natural Gas (MGNL) have increased prices by 3-4 per kg. As per Emkay's note, this seems to imply a staggering increase and major players like IGL, MGL, and Gujarat Gas possibly following suit.

On IGL valuation, the analysts note said, "Delhi CNG price being hiked to Rs85/kg would make it ~25% cheaper than the current petrol price, which is the hurdle rate for conversion (20-25%, as per industry). With Brent at $85/bbl now, petrol prices have downside risks, though recovery of past losses and excise cuts could mean the status quo continues. We thus see a limited earnings downside for IGL and, pending the Parikh panel’s decision, retain Buy with TP of Rs465."

On Monday, ONGC shares rose by 4.3% to close at 132.35 apiece on BSE. While Oil India shares climbed over 3.3% to end at 180.30 apiece. On the other hand, GAIL shares dipped by over 2% to close at 85.25 apiece, while IGL shares dived by 2.7% to finish at 385.95 apiece.

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