ONGC Is The Top Gainer On Nifty. Here’s Why

Shares of Oil and Natural Gas Corp. surged, making the explorer a top gainer on the Nifty 50, on reports that India is considering a floor price for natural gas produced from local fields.

The nation’s Oil Ministry has suggested benchmarking domestic producer gas price to Asian LNG price with a discount of about a dollar, Bloomberg reported on Friday quoting people aware of the matter. Under the government’s new administered pricing rule, rates of domestically produced natural gas get revised every six months.

Reacting to the development, ONGC gained as much as 6% in Monday’s trade compared with a 1.23% rise in the Nifty 50 Index.

The current environment of low Asian gas prices is opportune for a shift in gas price formulae. If implemented, this will also make almost all key petroleum products in India close to global benchmarks and reduce government’s intervention to a very minimal level, according to Morgan Stanley.

The policy, according to the research firm, will improve ONGC’s earnings and cash flows in the next financial year. That corroborates Credit Suisse’s views.

The research firms, however, differ on the policy’s implication on city gas distributors.

Here’s what the brokerages have to say:

Morgan Stanley On ONGC

• A move away from overseas inorganic growth towards domestic expansion into downstream and renewables, with strategies that help the government’s objective to decarbonise, remain key to drive ONGC’s re-rating.
• Reduction of debt, which had risen materially owing to HPCL’s stake acquisition in F20, should support the stock in near term.
• ONGC is currently pricing in near zero value for its domestic oil and gas reserves, making valuation quite attractive on current Brent forward curves.
• ONGC’s domestic gas realisation is currently near $2 per metric million British thermal unit, determined from a benchmark of three global gas hubs, and is adjusted biannually.
• Domestic gas accounted for 40% of ONGC’s FY20 hydrocarbon sales and if the above policy is implemented, it would raise consolidated FY22 earnings 20-22%, and improve annual cash flows by $0.5-0.6 billion (10% of free cash flow in an environment of $50 per barrel Brent oil).

Morgan Stanley on City Gas Distributors

• Does not believe this hampers city gas distribution stocks.
• Compressed natural gas consumers have shown ability to pay $3-3.5 per mmbtu for domestic gas in 2019 and prices for alternative fuels (petrol, diesel) in those years were 16-20% below current levels.
• There should also be a faster adoption of LNG as consumers become less agnostic to the source of gas, which will be beneficial for industrial players like Gujarat Gas Ltd.

Credit Suisse On ONGC

• Rising producer gas prices should reverse multiple decades of losses that ONGC has borne — domestic gas made up 40% of its FY20 hydrocarbon sales.
• Higher profitability, if deployed efficiently, should also help in re-rating.

Credit Suisse On City Gas Distributors

• Market is expecting margin expansion from APM price reduction from Oct. 1, 2020 and if Japan Korea Marker linked prices are implemented there may be no margin expansion and hence a negative surprise.
• As retail prices are adjusted for Japan Korea Marker-linked prices, retail prices need to be increased by Rs 7-8 per kg or 17-18% and this impacts attractiveness of CNG to petrol.
• Residential cooking gas becomes expensive to LPG and therefore it would either impact penetration of residential cooking connection or companies may have to take some margin hit.
• The potential impact on Indraprastha Gas Ltd. and Mahanagar Gas Ltd. would be higher as CNG and residential PNG accounts for 80-87% of their volumes.