Thursday, May 20, 2010

>Gas Price Hike – Impact Analysis (INDIA INFOLINE)

The Government of India has approved hike in APM gas price from Rs3,200/scm to Rs6,818/scm. The revised price is close to US$4.2/mmbtu, the price approved by Empowered Group of Ministers (EGOM) for Reliance Industries’ KG-D6 gas. The decision comes as a big trigger for ONGC and Oil India, as it substantially improves profitability for both companies. For
ONGC, we estimate an increase of Rs14 in FY11E EPS and for Oil India, we expect an increase of Rs10 in FY11E EPS. One of the key reasons for the steep valuation discount for ONGC and Oil India, when compared with regional peers has been lower gas prices. We believe, the price hike, is the first step towards a market determined pricing mechanism for natural gas in the longer term. We maintain our BUY rating on ONGC and Market Performer on Oil India.

ONGC: Major beneficiary on account of price hike
ONGC’s average realization for sale of natural gas from its own fields was Rs3.2/scm or US$1.7/mmbtu as against average price of US$5/mmbtu for sale of gas from PMT fields and US$4.2/mmbtu decided by EGoM for RIL’s KG-D6 field. The current price hike in administered prices of natural gas would result into 14% increase in FY11E EPS of ONGC. We maintain our BUY rating on the stock with a target price of Rs1,327. Our target does not change as we value the stock on EV/Boe basis. Considering a very high probability of a gas price hike we had raised our target EV/Boe for ONGC by US$0.5 in November 2009, when the government was contemplating a 31% hike in gas prices.

Oil India: dual gains of lower cost and higher realizations
OIL India bears the same risks when compared with ONGC in terms of subsidy sharing and lower gas prices. However, with the company planning to double its gas production over the next five years and most of its production being in low cost onshore regions, we feel price hike if any would translate into robust earnings growth for Oil India in the longer term. The current gas price hike, we believe, will increase Oil India’s FY11E EPS will increase by 10%. We maintain our
Market Performer rating with a target price of Rs1,237.

To read the full report: GAS PRICE HIKE