How gas price hike may impact RIL, ONGC, GAIL, OIL earnings

Moneycontrol Bureau

Reliance Industries is seen as benefitting most from the government's decision to double the price of natural gas with effect from April 1, 2014. In a note to clients, brokerage house CLSA has analysed the likely impact of the move on the earnings of oil & gas majors.
Excerpts from the report:

Reliance Industries: This price hike will make the FY15 EPS growth of 19 percent more believable and could take the stock near our target of Rs 930/share, which nearly corresponds to its historical average PE of 11.8 times. More importantly, this gas price hike should make some of Reliance’s discoveries commercial and accelerate approvals for developing nearly 4 TCF(trillion cubic feet) of discoveries. q At the same time, this should also incentivise Reliance to carry production improvement programmes in its producing fields in D6.

ONGC, OIL: Unlike Reliance, ONGC and Oil India are not neat beneficiaries of this price hike as the government may choose to take back a part of this benefit by increasing subsidy burden of these companies. Nonetheless, even under an oppressive scenario of continuation of FY12/13 subsidy
formula of USD56/bbl subsidy on liquid production, we expect ONGC/OIL's fair
value to settle 6/4% higher than the current market price.

GAIL: A price hike to USD 8/mmbtu gas used as feedstock for LPG and petchem production by GAIL lower its EPS by Rs 9.4 (31%) and fair value to Rs 295/share. In our opinion, Gail bears subsidy on LPG production on the logic that it benefits from using controlled price gas as input. Therefore, a sharp hike in gas price makes a strong case for Gail to be exempted from subsidy burden which could boost fair value to Rs 445/sh (+49%) and this could be a blessing in disguise for Gail. Any increase in gas production outlook should be a boost for Gail's core gas transmission business, which has been impacted by four years of decline.

Also read: RIL, ONGC, OIL shares rally on gas price hike