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Sector Update - Natural Gas - Kotak

Posted On: 2018-10-05 08:10:50

Half yearly gas price revision - positive for upstream companies

- The government of India/Ministry of petroleum and natural gas, as per the New Domestic Gas Pricing Guidelines, 2014, has revised the price of natural gas, produced domestically.

- With effect from 1st October 2018, the domestic gas price is revised upwards to US$ 3.36/mmbtu (+10%) from US$3.06/mmbtu on Gross Calorific value (GCV). On Net Calorific value (NCV), the domestic gas price is revised upwards to US$3.73/mmbtu from US$3.40/mmbtu.

- Domestic gas prices are calculated by taking weighted average price at Henry Hub of the US, National Balancing Point of the UK, rates in Alberta (Canada) and Russia with a lag of one quarter.

- The revised gas price is applicable from 1st October 2018 till 31st March 2019. As per the new gas pricing formula, gas prices are to be revised every six months.

- Deep-water, Ultra deep water and high Pressure-High Temperature arears: Similarly, with effect from 1st October 2018, the domestic gas price for gas to be produced from discoveries in Deep-water, Ultra deep water and high Pressure-High Temperature arears, is revised upwards to US$ 7.67/mmbtu (+13%) from US$6.78/mmbtu on Gross Calorific value (GCV). On Net Calorific value (NCV), the domestic gas price is revised upwards to US$8.52/mmbtu from US$7.53/mmbtu.

- Upstream companies like ONGC (biggest beneficiary), OIL India and RIL are the key beneficiaries of higher domestic gas prices. Along with this, weaker rupee will further boost its earnings. Every US$1/mmbtu increase in gas price led to increase in ONGC's revenue by Rs.40 bn.

- In August 2018, India's gas production was up by 0.6% yoy to 90 mmscmd supported by higher gas production by ONGC. ONGC gas production rose by 5.6% yoy to 67 mmscmd. Whereas, Oil India's production declined to 7.6 mmscmd (-9% yoy) and production from private players/JVs continued to decline and stands at 16 mmscmd (-12% yoy).

- On the flip side, higher gas price along with weak INR will negatively impact city gas distribution (CGD) companies and may impact margins. IGL has increased CNG prices by 4% to Rs.44.3/ kg and PNG price increased by 4.6% to Rs.29.55/SCM in Delhi. Similarly, MGL has increased the CNG price by 7.5% to Rs.49.61/kg and PNG price by 7.9% to Rs.29.4/scm (slab 1) and by 6.5% to Rs.35/scm (Slab 2) from 1st October 2018 to partly combat higher raw material cost.

- India's total Gas consumption mix: Major consuming sectors are fertilizer (25%), power (18%), CGD (15%), refinery (12%), petrochemicals (6%) sector and balance by others.

- With higher crude oil prices, weak currency and higher domestic gas price, we remain bullish on OIL India (BUY, TP Rs.245).
- Due to higher valuation, we remain SELL on IGL (TP Rs.257/share). However, remains positive on MGL due to attractive valuation (ACCUMULATE, TP Rs. 1030/share).

Shares of Mahanagar Gas Ltd was last trading in BSE at Rs.809.95 as compared to the previous close of Rs. 810.1. The total number of shares traded during the day was 25041 in over 1324 trades.

The stock hit an intraday high of Rs. 816.25 and intraday low of 803.55. The net turnover during the day was Rs. 20278310.

Source: Equity Bulls

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