The Telegraph
Wednesday , March 26 , 2014
CIMA Gallary

Oil stocks take a beating

Mumbai, March 25: The share prices of the country’s top oil and gas producers were clobbered today after the Election Commission (EC) asked the Union government to defer the proposed gas price hike till the completion of the general elections.

The fear is that the postponement of the gas price hike will impact the earnings of companies such as Reliance Industries Ltd (RIL) and Oil & Natural Gas Corporation (ONGC). Experts said the development also had the potential of delaying the gas pricing mechanism as the new government could take some time in studying the entire process if it was keen on a review of the mechanism.

Reflecting these concerns, shares of RIL ended nearly 3 per cent (Rs 25.95) lower at Rs 878.65 after hitting an intra-day low of Rs 872.60 — a drop of nearly 3.53 per cent.

Similarly, the ONGC scrip finished with a loss of 0.34 per cent at Rs 320.10 while the Oil India stock fell almost 3 per cent to Rs 471.70.

On Monday, the EC asked the petroleum ministry to put off its plan to introduce a new gas pricing policy from April. This was because the Supreme Court had not yet given its verdict on a petition challenging the gas-pricing formula. The formula would have raised the price of gas from $4.2 per million British thermal unit (mBtu) to around $8.4 per mBtu.

Reacting to the development, analysts said it would adversely impact the earnings of the three gas producers in the next fiscal.

“We see a negative impact on the 2014-15 earnings estimates of ONGC, Oil India and RIL, as a new government might take time to revisit the gas pricing mechanism and come up with a new formula, if it chooses to do so. Until then, upstream companies are likely to continue with the existing gas price of $4.2 per mBtu,” a note from Kotak Securities said.

The brokerage added that low natural gas prices would prevent meaningful investment in the gas sector.

It said that a price of $8-$10 per mBtu would enhance the commercial viability of several deepwater discoveries of ONGC and RIL, which had seen limited progress so far presumably because of lower returns at a price of $4.2 per mBtu.

Global brokerage Barclays said that if the next government did not scrap the decision altogether, this could defer upside for gas producers by one quarter, cutting 2014-15 gas realisations for these companies by $0.9 per mBtu, or 10.5 per cent.

“While the impact on Reliance is less significant, we estimate this could cut 6 per cent from ONGC and Oil India’s 2014-15 earning per share,” it added.