Proposed gas price tweak a short-term relief for CGDS
May marginally hurt gas producers like ONGC, OIL, say analysts
The proposed revision in the domestic gas pricing formula by the Kirit Parikh Committee is likely to benefit city gas distribution companies (CGDS) in the short term, while it may marginally hurt gas producers such as Oil and Natural Gas Corporation (ONGC) and Oil India (OIL), observe analysts.
The committee on Wednesday recommended a floor and ceiling price of $4 per metric million British thermal unit (mmbtu) and $6.5 per mmbtu, respectively, for gas produced from old or legacy fields of ONGC and OIL. This, say experts, is likely to offer headroom to CGDS to reduce prices and mitigate margin pressures to some extent. “The committee’s recommendations, if accepted by the government, could be positive for CGDS in the near term. They will have the flexibility to cut prices of compressed natural gas (CNG) and piped natural gas (PNG) by 20-25 per cent, making them competitive against alternative fuels like petrol, diesel, and liquefied petroleum gas,” says Deepak Jasani, head of retail research, HDFC Securities.
At the bourses, the shares of gas companies, including Indraprastha Gas (IGL), Mahanagar Gas (MGL), and Adani Total Gas, surged 15-69 per cent since April this year. By comparison, the Nifty50 and the Nifty Oil & Gas indices were up 7 and 9 per cent up, respectively.
According to the existing pricing norms, the government fixes the prices of gas from old fields every six months. In the latest revision for the October 2022-March 2023 period, the prices were raised by 40 per cent to $8.57 per mmbtu, tracking the surge in global markets.
Avishek Datta, research analyst at Prabhudas Lilladher, says the capping of prices will benefit IGL and MGL as domestic gas accounts for 90 per cent of the priority sector — PNG and CNG — demand.
“At a cap price of $6.5 per mmbtu versus the current $8.57, retail CNG prices could go down by ~7-8 per kilogram. Margin expansion for CGDS will depend upon the extent of passing on the benefit of lower gas prices,” said Datta in a note, maintaining a ‘buy’ rating on IGL, MGL, and ‘hold’ on Gujarat Gas. On the other hand, gas producers like ONGC and OIL are likely to record lower realisations due to the price cap.
According to Careedge Ratings, the price of domestic gas would have been $10 per mmbtu for 202324 (FY24), based on the existing formula. The revision, it says, will likely result in a lower realisations of at least $3.5 per mmbtu, and the producers of legacy fields could see a loss of up to ~23,000 crore in FY24.
Long-term impact
Experts, however, are not upbeat about the long-term impact of the new pricing regime for the sector.
Those at Kotak Institutional Equities believe that an annual increase of $0.5 per mmbtu on the ceiling price with linkage to the imported crude basket (10 per cent the average price of the previous month) can stall new CGD investments. The impact will likely be lower for legacy players — IGL, MGL, and Gujarat Gas.
According to Motilal Oswal, the price of domestic gas has largely been below $4 per mmbtu under the existing norms and would have been lower for CGDS, if there were no global geopolitical risks. “If the recommendations are implemented, then the minimum price will be raised to $4 per mmbtu, raising the prices for CGDS, which will be a negative for them,” it said.
Meanwhile, the Kirit Parikh Committee said that the minimum floor price will give ONGC and OIL the certainty of covering the cost of production plus some margin.
This, say analysts, is a muchneeded reprieve for these firms.