New Delhi: Oil and gas supply on fire today on reports that the government could soon be taking a decision on the gas price increase issue in the next few weeks. The S&P BSE Oil and Gas index increased nearly 3.3% in intra-day deals & outperformed the benchmark indices – the S&P BSE Sensex & the CNX Nifty that obtained 0.5% each.
At first, the gas prices increase based on the formula suggested by C Rangarajan panel was set to be efficient starting April 1, 2014. However, the matter got late because of the general elections. If executed, the gas prices could dual from the existing $4.2 per million British thermal unit to over $8, as suggested by the Rangarajan panel.
Reports now suggest that the petroleum ministry is predicted to create a presentation on the issues pertaining to the oil and gas sector to Prime Minister Narendra Modi in next few days and a clear direction on the road forward will be clear post that.
Amid individual shares, ONGC, which is one of the key beneficiaries of the increase in gas prices, rise over 6% and made a fresh 52-week high of Rs 459.75. Oil India, Gail India, Indian Oil Corporation Limited (IOCL), Reliance Industries (RIL), Bharat Petroleum Corporation Limited (BPCL), Petronet LNG and Hindustan Petroleum Corporation Limited (HPCL) moved up between 1 – 5% in intra-day deals.
STOCK STRATEGY
Given the sharp rally in these stocks in anticipation of implementation of the new gas cost formula, is there scope for a further upside? And, which ones should you purchase then?
Harshad Borawake, an expert racking the sector with Motilal Oswal Research maintains a purchase ranking on ONGC, BPCL and IOC in a recent report, whilst maintaining a neutral rating for RIL.
“We anticipate the next huge earnings growth only in FY17/18, when RIL’s big projects (petcoke gasification/off-gas cracker) commission. Near-term earnings are likely to be driven by gas cost rise in FY15 & Polyester expansion,” he said.
As respect ONGC, likely improve in net realisation because of reduced subsidy driven by continued diesel price increases; important receiver of scheduled gas price hike in FY15 and attractive appraisals are the key positives as per to experts.
Borawake has modelled gas cost of $6.3/mmbtu from FY15 versus likely new gas price of $8.4/mmbtu, to factor in probably subsidy towards power/fertiliser sector. However, if the full gas price benefit is passed to Oil India, then FY15E EPS will further improve by 16%, he says.
Experts at Barclays point out that though ONGC’s domestic production may restore only in FY15, higher gas prices and oil realizations may matter more for FY15-17E EPS (earnings per share).
“ONGC should benefit from the recent cost rise decision even if the government takes particular offsetting measures, in our view. Lower FY15 subsidy risk should also help. Valuation looks attractive relative to peers and its own history,” said Somshankar Sinha, an expert with Barclays Research.
Adds Dhaval Joshi, an expert with Emkay Global: “Oil marketing companies (OMCs) revealed a healthy performance in FY14. An enhancement in GRM (gross refining margins) on sequential basis supported higher profit while in Q4FY14. Overall, the debt position on year-on-year basis also increased. We continue to maintain our positive stance on OMC’s on pricing reforms. Also, any solution to the subsidy sharing mechanism would be big positive. We maintain Purchase on BPCL and HPCL & accumulate rating on IOCL.”
EPC World News Bureau
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