IGL, MGL gain up to 4% post Kirit Parikh panel gas pricing recommendations

Shares of oil & gas companies, including those of city gas distribution (CGD) companies, were in focus on Wednesday and moved higher by up to 4 per cent on the BSE intra-day trade on reports that the Kirit Parikh Committee recommended a floor and ceiling price for natural gas produced from legacy fields for a period of five years.

ONGC will be paid a floor price of US$ 4/mmbtu and ceiling price of US$ 6.5/mmbtu. The ceiling price will have an annual escalation clause. The escalation being suggested is US$ 0.5/mmbtu annually with no change in pricing for the first 2 years or a US$ 0.25/mmbtu annual escalation for five years. The committee may not change the existing pricing formula for difficult fields such as KG-D6 of Reliance Industries, PTI reported.

Following these reports, the S&P BSE Oil & Gas index hit a 52-week high of 20,653.57 in intra-day trade on Wednesday. It, however, settled at 20,610 levels - up 0.8 per cent, as compared to 0.7 per cent gain in the S&P BSE Sensex.

Among individual stocks, Indraprastha Gas (IGL), the top gainer among the pack, was up 4 per cent at Rs 451.70 on the BSE in intra-day deals. The counter ended the day at Rs 442 levels, up 1.9 per cent. Mahanagar Gas (MGL), Gujarat Gas Company, Oil India, Indian Oil Corporation, Petronet LNG, Bharat Petroleum Corporation (BPCL), Reliance Industries (RIL) and Adani Total Gas gained between 0.5 per cent and 2 per cent. 

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Meanwhile, as per another media report, Revenue Secretary Tarun Bajaj has said that the windfall tax will be slashed, or scrapped, as the global oil prices decelerate.

If the Kirit Parikh committee recommendations are implemented, the move would be positive for downstream companies such as IGL, MGL and Gujarat Gas., and marginally negative for ONGC (neutral for RIL), according to a recent note by ICICI Securities.

“We expect lower sourcing costs (Rs 6-8 per scm) to benefit the CGDs on the margin front to an extent and rest be passed onto to customers (raising lucrativeness of CNG, PNG over alternate fuels). Thereby, we expect 10 per cent increase in FY24E EPS for IGL, an 18 per cent increase in FY24E EPS for MGL and 8 per cent increase in FY24E EPS for Gujarat Gas. For HTHP fields, we expect an element of pricing freedom to encourage continued investments in that field,” the brokerage firm said.

Gas pipeline tariff

Meanwhile, in another development, the Petroleum and Natural Gas Regulatory Board (PNGRB) has revised the natural gas pipeline tariff regulations. While the expected return ratio remains the same (IRR: ~12-14 per cent range), tariff determination for pipelines by the regulator have been amended, to reflect more ground realities and support economics of newer pipeline.

The few highlights include, capacity utilisation ramp up to occur over a 10-year period instead of 5 years, volume adjustment would now be possible in case actual volumes are higher than normative volumes, capacity expansion of pipelines from new gas sources would be exempted for tariff calculations for 5 years and lower tax rate of 25.2 per cent would be applied prospectively (and no retrospective taxation).

According to ICICI Securities, the changes are positive for Gujarat State Petronet (GSPL) and GAIL as it would encourage capacity expansion and completion of pending projects.

 

“The amendments made to the pipeline tariff regulations will benefit GSPL as it will help with the company's expansion plans and improve transmission volumes. GAIL would be benefitted to a lower extent when compared to GSPL due to the uncertainty surrounding its other business segment,” the brokerage firm said in a recent oil & gas sector update note.