Bottomline positive

Deepak Pareek, research analyst, oil & gas at Angel  Broking on the impact of the APM gas price hike

The Government of India has approved a hike in APM gas price sold by ONGC and OIL from nomination blocks from Rs 3.20/scm to Rs 6.82/scm. After the hike, APM prices are now in line with EGoM-determined gas prices for the KG-D6 (US $4.2/mmbtu; pre-royalty adjusted), from US $1.9/mmbtu earlier. APM gas prices have been at Rs 3.2/scm (at 10,000 Kcal) since July 2005. However, adjusted for calorific value, ONGC’s realisations were at Rs 2.88/scm (US $1.8/mmbtu). This move follows the finance ministry’s suggestion of bringing about pricing parity between APM and KG gas in one swift move rather than a phased increase in the APM gas prices as proposed by the petroleum ministry. The prices will be effective until March 2014.

In a related development, the cabinet has also approved marketing margins of US $0.112/mmbtu (Rs 200/scm) for GAIL on APM gas marketing volumes. Earlier, GAIL did not receive any marketing margin on sales of APM gas.

The decision comes as a big trigger for ONGC and Oil India, as it substantially improves the profitability of both the companies. The move would benefit ONGC, which had lost Rs 4,745cr in revenues on selling 17.71bcm of gas at the government’s fixed rate in FY2009. The move would lead to some profits now from the gas business for ONGC. The price hike is a pleasant surprise, both from the quantum as well as the timing perspectives. We were expecting a gradual hike in gas prices instead of an increase in one go; thus, the quantum of the hike is much higher than our estimates.

We expect ONGC to gain around Rs 6,086 crore on the topline, and Rs 4,047 crore on the bottomline during FY2012E on account of the price hike. Similarly, we expect Oil India to gain around Rs 941 crore on the topline and Rs 622 crore on the bottomline during FY2012E. Given the fact that Oil’s net gas realisations were lower than that of ONGC’s APM realisation, it stands to benefit more on account of the increase in the gas prices to US $4.2/mmbtu.

Though GAIL uses gas for its petrochemical and LPG operations yet, as it was not procuring APM gas, the company is not likely to be impacted by the gas price hike. However, we believe that marketing margins allowed to GAIL will add to its topline and profitability. According to our calculations, GAIL benefits by around Rs 344 crore on the PBT and Rs 239 crore on the bottomline.

Source: energybusiness.in

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