Analysts See Oil India, ONGC, GAIL On Track To Reap Rich Gains. Here’s Why…
Analysts see explorers Oil India Ltd., and Oil and Natural Gas Corp., and transmission firm GAIL (India) Ltd. reaping gains as international gas prices rebound on recovering demand.
The average price of the natural gas benchmark—Japan Korea Marker—surged more than 45% in May over the average price of March, according to a Bloomberg Intelligence report. The comes after prices declined from all-time highs between January and March.
The prices are likely to sustain due to the gradual tightening of the global LNG market, driven by recovering demand and minimal supply growth, the report said. Demand from China, Japan, and Korea due to restocking of the inventory for the next winter, a decline in European gas storage and plant outages in Russia and Australia will help keep LNG prices high in the next few quarters, it said.
Bloomberg Intelligence’s forecasts for Japan Korea Marker in the second and third quarter of 2021 stand at $9.25 and $10.24 for every metric million British thermal units, respectively. The spot price is $9.98.
The forecasts appear understated and do not fully estimate the LNG market tightening and volatility, according to Bloomberg Intelligence. It cited Citi Research analysis that raised forecasts for Asian LNG and European natural gas prices by about $2 for the second, third, and fourth quarters of 2021.
“There is a ‘very strong’ LNG demand, particularly in Asia, and Europe carbon prices are higher than expected. Buying to refill storage sites and the threat of supply disruptions helped boost prices,” Citi said.
Rising global gas prices will also push the domestic gas price higher when it is revised. Changed twice a year, the next revision will be effective Oct. 1
India's administered gas rates factor in volume-weighted annual average prices of four global benchmarks—U.S. Henry Hub, Canada Alberta gas, U.K. NBP, and Russian Natural Gas with a lag of one quarter. The benchmark prices at Henry Hub, U.K. NBP and Canada Alberta have risen 13%, 44%, and 16%, respectively, since March.
An Emkay report estimates a 58% increase in the domestic gas price to $2.8/mmbtu in October compared with the prevailing $1.79.
An expected rebound in the U.S., China and Europe has also driven Brent crude prices 30% higher so far this year. Bloomberg forecasts the benchmark to average $65 a barrel in 2021, around levels in May.
Here’s how brokerages expect all these factors to aid OIL, ONGC and GAIL:
ICICI Securities On GAIL
- The surge in gas and oil prices is likely boost GAIL’s FY22 estimated earnings per share by 22-32%.
- GAIL’s marketing Ebitda fell in FY21 because of lower realisation as it had to sell Henry Hub-linked gas at low spot prices.
- The surge in oil and spot LNG prices should enable GAIL to sell Henry Hub-linked U.S. LNG at higher prices, ensuring gas marketing Ebitda is in the black in FY22.
Emkay On ONGC
- A rise in prices of alternate fuels like naphtha, fuel oil and coal, and LNG implies that deep water ceiling—or gas from difficult fields— should also increase from $3.6 a unit to $6-7 unit in the second half of FY22.
- That would boost KG Basin gas realization for ONGC.
ICICI Securities On Oil India
- Higher domestic gas prices will increase realisations for Oil India.
- Expects OIL’s estimated EPS to rise 1% and 7% in FY22 and FY23, respectively, on higher gas prices.