Analysis: Gas price hike impact on ONGC

The markets have reacted positively to the hike in ONGC and OIL's natural gas prices (from Rs 3,200/tcm to Rs 6,818/tcm) affected by the government, with former gaining over 8 per cent in intra-day deals today. The quantum of hike, however, was in line with Finance Ministry’s stance of bringing parity between APM gas prices and pricing of gas from KG-D6 fields, at one go. Currently, ONGC’s average realization for sale of natural gas from its own fields stands at Rs 3.2/scm or $4.2/mmbtu as against average price of $5/mmbtu for sale of gas from Panna-Mukta-Tapti (PMT) fields and $4.2/mmbtu decided by Empowered Group of Ministers (EGOM) for RIL’s KG-D6 field. The price validity is till FY14. The decision brings huge respite for ONGC that was saddled with subsidy sharing burden due to under recoveries in auto fuels and LPG. The company expects to offset the under recoveries in gas business that stood at Rs 4750 crore in FY09 and are pegged at over Rs 5,000 crore in FY10 following the hike in gas prices. ONGC currently supplies around 19-20 billion cubic meters (bcm) of APM gas. “The price hike to $4.2/mmbtu would result in an incremental PAT of Rs 3,900 crore, implying an increase of 21 per cent based on FY10E estimates,&" states Ambit research. The move that helps ONGC to breakeven in gas business will on the other hand result in hike in electricity generation tariff and fertilizer production costs. Consumers of this gas mainly comprising power and fertilizer sectors will have to pay $4.2/mmbtu (inclusive of a 10 per cent royalty on the base price). While fuel cost in power will be passed on to consumer and for government, subsidy on fertilizer companies would increase. The EGoM is expected to meet in the first week of June 2010 to review the auto fuel pricing policy and decide on implementation of the Kirith Parekh report. Analysts are hopeful that given the current crude oil prices, the EGoM may take positive steps towards de-regulation of prices. The stock is a good addition to portfolio for the long-term, they suggest.