The Rangarajan Committee’s suggestion of a new gas pricing formula will benefit producing companies such as Reliance Industries (RIL), Oil and NThe Rangarajan Committee’s suggestion of a new gas pricing formula will benefit producing companies such as Reliance Industries (RIL), Oil and Natural Gas Corporation (ONGC) and Oil India, though power and fertiliser players will be left smarting, according to analysts.atural Gas Corporation (ONGC) and Oil India, though power and fertiliser players will be left smarting, according to analysts.
The Rangarajan Committee’s suggestion of a new gas pricing formula will benefit producing companies such as Reliance Industries (RIL), Oil and Natural Gas Corporation (ONGC) and Oil India, though power and fertiliser players will be left smarting, according to analysts.
The panel suggested last week that gas prices be fixed on the basis of weighted average of a few global gas price benchmarks, and made completely market-linked over a five-year timeframe.
This, analysts say, will increase the gas price to almost double the current level, to the benefit of the producers, though its implementation could well extend beyond the 2014 elections.
“The new formula would mean a domestic gas price of $8.1/mmBtu (million metric British thermal unit) as of today versus the current range of $2.52-5.65/mmBtu and almost double that of the current $4.2/mmBtu for most domestic gas,” Goldman Sachs analysts Nilesh Banerjee, Vikas S Jain and Siddharth Raizada said in a recent note.
This will lead to a re-rating of the stock of RIL, which had been battered by the market in the last several months since production from its much-hyped Krishna-Godavari basin started declining.
“…every $1/mmBtu increase in gas prices would positively impact RIL’s FY15E EPS by about 3%,” the analysts said, adding that the figure goes up to 7-8% for ONGC and OIL, although that would happen with a time lag after the price is increased.
Gagan Dixit, a senior oil and gas analyst from international brokerage Quant, said both ONGC and RIL would see a jump in their share price once the $8 per mmBtu figure is touched in gas prices.
He, however, felt the impact on RIL will be a little subdued as the bulk of its revenue is still dependent on downstream operations.
ONGC’s fair value could go up 24% from the current market price, or Rs62 a share, while RIL’s fair value would increase by just 6%, or Rs47 a share, even assuming 5 trillion cubic feet (tcf) of gross reserves in KG-D6 block versus 2 tcf at present.
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