Gas price hike: ONGC top gainer; see EPS boost, says I-Sec

The Cabinet Committee on Economic Affairs' (CCEA) decision to hike the gas price to USD 8.4 per mmbtu (metric million British thermal units) from April 2014 has boosted sentiment towards oil and gas companies.

Speaking to CNBC-TV18, Rohit Ahuja, Oil and Gas analyst at ICICI Securities said that Oil and Natural Gas Corporation (ONGC) was the biggest beneficiary from Thursday's CCEA meet as it is the largest producer of gas in the country. He saw an earnings per share (EPS) increase of more than 21 percent for FY15.

Meanwhile, he expects the gas price hike to ramp up activity in the KG basin, which will lead to increase in volumes for Reliance Industries in the second half of the year. He also sees long-term benefit due to higher production for Gujarat State Petronet Limited (GSPL).

On the falling rupee, he said that the weak currency had been impacting the liquefied natural gas (LNG) to a major extent. He did not fully buy into the argument for excluding Gas Authority of India Limited (GAIL) from subsidies.

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

Below is the edited transcript of his interview to CNBC-TV18.

Q: Just a word on your pecking order between Oil and Natural Gas Corporation (ONGC), Oil India and Reliance Industries; which one stands out as the key beneficiary because of last evening’s developments?

A: ONGC is the biggest beneficiary. They are currently the largest producer of gas. We see an EPS increase of more than 21 percent for FY15. Oil India will be second considering they are also usually impacted by this.

For Reliance, we had already built in USD 8 per mmbtu pricing for the beginning of the next year. They have deep water fields. Huge amount of activity can be seen from them in the second half of the year as the fair-weather winds start in the KG basin.

And they have this new discovery the MJ1. So some more wells being drilled can be seen.

We are eager to know how it will be near term KG-D6 production trajectory. Their guidance for Q4 says that they will have some compressive booster and other infield well drilling programs. It could result in some increase.

But for them, it is more a back-ended benefit. Whatever new fields they develop, it will take about four-five years from now. So, it is boosters as far as their investments are concerned. But does it translate into immediate increase in volumes over the next one-two years needs to be seen.

Q: What kind of implications would it have for a stock like GSPL?

A: Gujarat State Petronet Limited (GSPL) would benefit over a long-term primarily from increase in domestic production. We have seen their volumes declining over the last few quarters. They are currently at about 23-24 mmscmd (million metric standard cubic meter) compared to last year where they were about 30 mmscmd.

This has been as a result of decline in Reliance’s KG D6 gas production and liquefied natural gas (LNG) pricing being high. The rupee depreciation is also hitting LNG demand to a major extent. There are multiple factors to look at but an immediate gain for them is not seen.

But what we see for the industry and gas utilities overall this is a game changer event for them. We are looking at lot of investments coming through in development of many of the discoveries.

Some of the independent reports have pecked at 27 trillion cubic feet (TCF) which is viable at about USD 8 mmbtu. These gas productions, whenever they come in, most of these utilities including GAIL (India) have invested heavily in building up incremental pipeline capacities.

GSPL is more than doubling their pipeline capacity across India. They are going from being within Gujarat to cross country. They are heavily dependent on favourable outlook. But there is a big fundamental change that is going to happen.

It takes domestic price closer to LNG. We had a USD 10 per mmbtu gap between LNG and domestic price which is now narrowed down to about USD 3-4. That is a big fundamental change.

We see LNG becoming more viable now as an alternative. It is a long-term event but that is extremely positive for the entire industry.

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Q: You have a buy on GAIL (India) at this point. You are not changing targets because of the gas price increase as the GAIL management pointed out to us too that they may be exempted from any subsidy bearing?

A: Yes. But we are not buying that argument fully into our estimate. We have already given them a hit on the big fall in their petrochemical and LPG business profitability.

Logically, yes they are buying APM gas for LPG production. LPG business bears subsidy. So, the government should do adjustment.

But where I derive confidence from is, that last year one saw FY13 their share among the upstream falling significantly to 4.5 percent. It used to be around 5-6 percent on an average in the previous year in FY12. So, we have seen government gradually trying to phase out GAIL out of subsidy sharing.

This event should trickle in a big way. ONGC, Oil India will gain more than Rs 11,000 crore at the revenue level from these gas price hikes at USD 8. Hence, they can easily probably share GAIL’s burden of Rs 2,000-2,500 crore on account of this.

Among the PSUs, GAIL will be losing out at the cost of benefit to other PSUs. A higher probability is of them going out of subsidy sharing. But that is not factored in yet. That is an event which carries a lot of uncertainty but high probability for that to happen.