Emkay's report on oil & gas
Long awaited call on Gas pricing has been taken by the government. Though it came lower than the consensus estimate of $6.5-7/mmbtu to $6.2/mmbtu (on NCV basis) but boosted overall sentiment of the sector. Gas prices will be revised half yearly
The revised gas price would be applicable to all gas producers (for ONGC, OIL India and others) and for all discoveries after this decision in Deep Water Areas a premium would be given on the gas price (for RIL)
Reliance will continue to get older price till the ongoing arbitration continues. However differential amount would be credited to the gas pool account maintained by GAIL which will be disbursed based on outcome of arbitration
Government declared full deregulation of Diesel prices and henceforth be market determined. Moreover, government re-launched Direct Benefit Transfer scheme more effectively
We believe implementation of gas price would be also positive for RIL as CCEA note clearly stated that deep water discoveries post this decision would get premium on gas price and most of the RIL fields(MJ1, R-series) are in deepwater.
Thus, we do not change our earnings estimates and target price, as the new gas price came close to our assumption of $6/mmbtu. Considering this, our target price for ONGC/Oil India comes at Rs460 and Rs 695 respectively. For RIL we have not changed our target price as we await the right pricing for deep water blocks. Thus we maintain our Buy on RIL with target price of Rs1168 (FY17 SOTP).
Considering the new pricing formula (which is less volatile), the gas production from ONGC/OIL India would continue to go in top priority sectors like CGD, Fertiliser and Power as it directly affect the common people. Premium pricing of Reliance gas from deep water area would go to heavy industrial sectors where they are likely to replace domestic gas with Imported LNG, which comes at $13-14/mmbtu currently. Thus, the decision of new gas pricing is favorable for both consumers and suppliers.
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