As gas prices see a sharp spike, watch out for these Oil & Gas stocks – experts give sector outlook

The prices of gas have been raised after a gap of almost 2 years and this time the spike has been 62 per cent. In the international markets, the prices have been raised from USD1.79 mmBtu to USD 2.9 mmBtu. The price of gas extracted from difficult fields have also gone up by 84.6 per cent.

The Nifty Oil and Natural Gas ended in the green on Friday at 7797, up by almost 0.3 per cent from the Thursday closing price. In the 15-share index 8 stocks advanced while 7 declined.  Experts give you sector outlook and which stocks will be in focus when the markets reopen on Monday.  

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“The Ministry of Petroleum and natural gas (MoNG) in accordance with the New Domestic Natural Gas Pricing Guidelines, 2014 has increased the domestic gas price to US$3.2/mn BTU for H2FY2022 from US$2/mn BTU in the previous half. This gas price hike is as per the government stated formula and so it is on expected lines,” Sumit Pokharna, Vice President - Fundamental Research at Kotak Securities said

“We believe gas price hike will be positive for upstream sector which includes ONGC, OIL India, RIL and Hindustan Oil Exploration. On the flip side, domestic gas consuming sectors like City gas distribution (like IGL, MGL and Gujarat Gas) will get impacted in the short-run,” he added.

IGL had undertaken a price hike on August 30 to mitigate higher cost of incremental LNG that it had to use for its CNG segment given capping of domestic gas allocation at 110 per cent of CNG consumption in H2FY21, he said.

“We note that IGL and MGL will be required to take price hikes of around Rs5-7/kg to pass on the impact of higher domestic gas price in 2HFY22,” Pokharna further said.

Sonam Srivastava, Founder at Wright Research attributes the steep hike in price of natural gas to Government’s willingness to catch up with the global gas prices which are at multi-year highs due to various reasons linked to the shutdown and other natural causes.

“This steep rise in prices will provide limited relief to India's upstream gas producers. It will negatively impact the sectors dependent on natural gas like power and fertilizers. It might also negatively impact the farming sector and raise inflation,” Srivastava said.

Stocks that would gain from this move are upstream gas producers, she said. MRPL is already up 9 per cent after the news and ONGC, GAIL, Indian Oil are also up.

The price hike will sway the earnings of major oil companies like ONGC, Oil India and Reliance Industries, she further said.

Meanwhile, analyst Divam Sharma, who is Co-founder of Green Portfolio opines that the natural gas prices were at all-time low at USD 1.79/mmBtu since September 2020. He said that the state-run oil companies like ONGC were facing losses given that their production cost was at USD 3.7/mBtu. With the increase in pricing, it will definitely bode well for oil companies, he says.

On the other hand, Gas Distribution Companies (GDC) that are the largest consumers of domestic gas under APM will likely face some margin pressure unless they pass on the price hike to end consumers, Sharma said.

GDC companies might feel some short term impact but in the long term, the hike will get passed on to end consumers, he said.

Also, fertiliser companies that use natural gas as raw material will see their operating expenses go up. So those companies will expect govt to be more generous on subsidies to maintain margins. So that is one sector that will get negatively impacted in absence of clarity from Govt.

Companies like ONGC, GAIL will definitely benefit from this move and can see valuation go up in the short term, he further said.

Pokharna of Kotak Securities believes that the CGD companies will pass on the burden to end-consumers.

Also Read: Gas price hike: Sectors and shares that will be affected the most— These stocks should be in investors' watchlist

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Natural Gas ended negatively on Comex on Saturday at USD 5.55, down by 5.45 per cent or USD 0.32. Meanwhile, on MCX, the October Futures ended at Rs 421.30 mmBtu, down by Rs 7.60 or 1.8 per cent.

Total number of CNG outlets across the country increased by 90 (+3% mom) to 3,323.