Government bites the bullet — gas prices hiked!

3 Oct 2022 , 10:31 AM

Gas prices hiked

The APM and HPHT gas prices have been reset by 40%/26%, respectively, for H2FY23. ONGC/OIL will earn US$8.57/mmbtu for the APM gas, while wellhead prices of gas produced from deepwater fields of RIL will be US$12.46/mmbtu on GCV basis. The bi-annual price revision is according to a transparent pricing formula set by the government. It was speculated that the government may not hike the APM/HPHT gas prices, as it has constituted a committee under Kirit Parekh to consider possible changes in the pricing formula.

Upstream and RIL set to gain

Analysts at IIFL Capital Services note the APM gas prices have seen an increase of 379% in past 18 months. However, these lag the spot (US$42/mmbtu) and term LNG contracts (US$14.5/mmbtu). Owing to sharp increase in gas prices, they see ONGC and OIL’s FY23/24 EPS changing by 5-13%. RIL – currently producing 18 mmscmd gas from deepwater fields – has contracted 6 mmscmd gas through auctions (~8% Brent), and will see gains on the balance leading to 2.5-5% EPS hike through FY23/24.

Cost push across user base

The variable cost of gas-based power plants will see increase of 35% (~Rs4.25-4.5/unit); becoming further unviable. There will also be increase in fertilizer subsidy. Perhaps, falling offtake from power sector may allow higher allocation to CGDs to offset incremental costs. CGDs need to raise prices by 10-12%. While they have pricing power, they may offer price stability and pursue volume growth. Sharp correction in their stock prices should offer good opportunity to accumulate.

Highest impact of gas price hike is on OIL, the lowest on RIL

EPS impact	FY23E	FY24E
ONGC	5.2%	12.9%
OIL	5.6%	12.7%
RIL	2.5%	5.2%

Source: Company, IIFL Research
E: Estimates