Cap at $9-10/mmbtu won‘t hurt oil companies: Amit Rustagi

In an interview on CNBC-TV18, Amit Rustagi of Antique Stock Broking said he doesn’t see any harm in putting a band on gas prices. He says the markets, investors as well as consumers will be okay if a cap is set at USD 9-10/mmbtu, instead of the one worked out by the Rangarajan Committee formula at USD 8-10/mmbtu since it is still going to be a 100 percent jump from the current USD 4.2/mmbtu.

But, he further adds that due to conflicting statements from the finance ministry regarding different consumer price has created confusion in the minds of investors, thereby affecting stocks like ONGC and Oil India. The positive impact of gas price hike is not reflected in the stock prices of these companies.
However, he believes even if these oil companies have to provide subsidies to the consumers, it won’t be more than USD 2-2.5/mmbtu. Besides, he says that gas price hike will definitely go up to USD 6, which will then take up FY15 earnings at least 25 percent higher than what they are making right now. And hence it will be a 20% upside for both ONGC and Oil India. Also Read: Rupee gains; RBI takes action on oil cos' dollar demand Below is the verbatim transcript of Amit Rustagi’s interview on CNBC-TV18 Q: What did you make of this talk about some kind of band being set out for gas prices and how do you think it could impact the stocks concerned?
A: Band is fine with the markets from the investors perspective also that if a cap is set out may be at USD 9-10/mmbtu then it is fine because as of now on the range of prices which have been worked out by Rangarajan Committee formula are between USD 8-10/mmbtu. So if any cap is put at USD 9-10/mmbtu then it is perfect and we are going to see 100 percent jump in gas prices from USD 4.2/mmbtu to anything above USD 8/mmbtu is acceptable to the market also. Q: The expectation earlier was that gas prices will get repeatedly calibrated on the way up depending on market prices over a period of time. This talk of a cap not letting companies make profits, do you get that suspicion though that this may also enter the regulated category like we have seen with oil prices out here and therefore upsides might be difficult to get beyond a point for many of these companies?
A: You have to see that for example when you tie-up any LNG contract internationally there are always caps and floors worked out in those contracts. Like Petronet LNG contract in the last five years there has been a cap and floor into the oil prices which can be used to derive gas prices. So prices have been moving in a calibrated manner. So similarly domestic consumers also need some production but we are not saying that production should be sat at a level of USD 6/mmbtu which will be negative for the investors and sentiments. I think any production which is set up to USD 9-10/mmbtu will be taken as neutral by the market.
Obviously we have to see that the consumer sector should not get impacted in a manner where tomorrow a new government comes or a new thought process comes because of the pain of the consumer sector and then they stop the entire process. So as we are seeing in diesel decontrol that 50 paisa hike is perfectly fine with consumers as well as political parties, we are not seeing a big news flow on that. So if you make it Rs 1-2 then that can actually create lot of trouble in terms of political parties coming back saying that why there is a diesel price hike.
So a moderate cap between USD 9-10/mmbtu is perfect and as of now all of us are assuming that globally LNG prices are going to remain at the higher end because Japan LNG price is one of the constituents in the Rangarajan Committee formula. However, six months down the line we don't know if nuclear reactors in Japan will start as is being stated in the media then we might see lower spot LNG prices for Japan also. So in that case prices will remain in the range of USD 8-10/mmbtu even if you worked out the Rangarajan Committee formula. So a cap of USD 9-10/mmbtu is perfectly fine and can work with the consumers also. Q: What could the potential impact be for some of the public sector companies like ONGC, Oil India, etc? Would you say some of the negatives of this kind of a cap would get mitigated because in any case it was factored in?
A: Yes, if you look at stock prices of ONGC and Oil India, none of them have been reflecting any benefit of gas price hike even today. It is because of the post gas price hike statements from the finance ministry regarding different consumer price has created confusion in the minds of investors. It is not clear if these companies have to provide a subsidy to the consumer sector. This kind of formula is prevailing in North East where the producer price is USD 4.2/mmbtu and consumer price is 40 percent lower than the producer price. And the difference between the two is worked out as a gas pool subsidy which is given by the government.
So ONGC is down 13-14 percent after the price hike was announced. So clearly it indicates that it is not discounting any gas price hike as of now but from the investors perspective we believe that at least USD 6/mmbtu gas price will be protected for ONGC and Oil India, the PSU names and even if they have to provide any subsidy to the consumers that won't be more than USD 2-2.5/mmbtu. So in that case upside lies ahead for ONGC as well as Oil India from both the factors that diesel under recoveries are coming down. Second is that gas price hike definitely they are going to get up to USD 6/mmbtu which will take up FY15 earnings at least 25 percent higher than what they are making right now. So in that scenario we are seeing at least 20 percent upside in both ONGC as well as Oil India.