Upgrade EPS for upstream companies: IIFL Capital Services

1 Apr 2022 , 10:49 AM

On March 31, the Petroleum Planning and Analysis Cell (PPAC) revised APM and HPHT gas rates by 110% (US$6.10/mmbtu) and 62% (US$9.92/mmbtu), respectively, for 1HFY23. Higher realization for HPHT fields should encourage operators such as RIL and ONGC to fast-track their deep-water production schedules. Analysts at IIFL Capital Services note that despite the price reset, domestic gas prices are lower than landed LNG prices by 45-50%; the differential is even more significant versus spot, ranging at 70-80%. Political will be tested in 2HFY23, when a similar price raise is expected.

Upgrade EPS for upstream players
Gas price hike bodes well for ONGC, OIL & RIL, which account for the bulk of domestic gas production in India. IIFL Capital Services has upgraded ONGC/OIL/RIL’s FY23-24 estimated EPS by 18-21%/14-15%/8-11%, respectively. GAIL consumes APM gas for LPG manufacturing; the increase in APM price will lead to almost Rs4.5-5 billion pa cost push, which is likely to be offset by strength in LPG prices. Sharp fall in LPG price remains a risk to earnings. Variable cost of generation for regulated gas IPPs will rise by 70-80% to ~Rs4/unit; the PLFs of gas plants which average at ~15% are likely to fall further.

City Gas Distribution (CGD) players have pricing power, but…
CGD players will need to increase CNG prices by Rs12-14/kg, to offset the rise in APM rate. Even post this surge, CNG will be cheaper than diesel/petrol by 35-50%, on running cost basis, indicating CGD players’ pricing power. But analysts at IIFL Capital Services believe the industry may take calibrated price increases, in sync with auto fuels. They expect some clarity before tweaking earnings estimates. Stock prices of CNG-heavy models are sensitive to such news flow.