Energy stocks drop after gas price increase deferred

MUMBAI (Reuters) - Shares in oil and gas explorers like Reliance Industries and Oil and Natural Gas Corp slumped on Thursday, a day after the government deferred a decision to increase the price of locally produced gas by three months, a move experts termed a temporary setback for the sector.

Reliance shares fell 3.7 percent, ONGC shares slumped 5.8 percent and Oil India dropped 2.8 percent. The BSE sub-index for the oil and gas sector ended down 3.9 percent, marking its biggest single-day fall since August 2013.

Investors said the delay was negative in the near-term but pointed out that a hike in gas prices was due in the coming months.

"This is an opportunity to buy into names like ONGC and Reliance. It's just a deferral and 5-6 percent falls in stock prices are actually good entry points. We are pretty sure of the government's agenda on gas price hikes," said Nirakar Pradhan, chief investment officer at Future Generali India Life Insurance.

Gas prices were set to almost double from April 1 under a formula approved by the previous government, but were delayed in the build-up to a general election that ended in May.

Oil minister Dharmendra Pradhan said on Wednesday the government had decided the issue needed "comprehensive discussion" and that a final decision would take into consideration the interests of all stakeholders.

Rating agency Moody's said the delay in the gas price increases and uncertainty over the new prices would discourage upstream producers from further investments in exploration and production (E&P) in India and has curbed the expected increase in revenue for the current fiscal year for the oil companies.

Mukesh Ambani, Reliance's chairman and the country's richest man, said last week that timely regulatory approvals and "market-based gas prices" were key to developing the company's resources.

Demand for gas in India far outstrips production, but prices have been kept low for important industries such as fertiliser production and power generation, deterring investment in the sector.

The cost of exploring new reserves - many of which are in deep water - is more than the current price, leaving Reliance and state-run ONGC reluctant to take the exploration risk.

Reliance and its partners in the key KG-D6 gas block off India's east coast have issued a notice of arbitration against the government over failure to implement the higher prices.

Reliance and ONGC did not comment on the government's decision.

(Reporting by Abhishek Vishnoi, Aman Shah and Indulal PM; editing by Tom Pfeiffer)