Published on 5/12/2020 12:34:15 PM | Source: ICICI Securities Ltd

Buy Oil and Natural Gas Corporation Ltd For Target Rs.124 - ICICI Securities

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Making sense of news flow on gas pricing

A committee has been set up to suggest changes to the prevailing price formula under which gas price fell to US$2/mmbtu in H2FY21. As per press reports, it may propose US$1/mmbtu discount to JKM spot LNG as the floor price. We are optimistic that a floor price would soon be introduced, at which ONGC would make money (its average production cost is US$3.7/mmbtu). Floor price may be US$4.2/mmbtu, which ONGC has asked for since FY17, or linked to JKM spot LNG. Reports also suggest GoI may gradually deregulate price of nomination acreage (APM) gas over not more than six years. This may be the roadmap for uniform market-determined price for all gas produced in India, which the oil minister has often talked of. GoI on 7th Oct’20 approved the procedure to be followed to ensure price of deregulated gas was truly market-determined. We expect gains for ONGC in the near term from the imminent revision in gas price formula and in the medium term from gas price deregulation. Reiterate BUY.


* ONGC’s gas price US$2.3-3.8/mmbtu in FY17-FY21 vs US$4.2-4.8/mmbtu in FY11-FY16: In FY97-FY10, price of ONGC’s APM gas was Rs2,250-3,200/mscm (US$1.3-2.2/mmbtu). In Jun’10 it was hiked to the same level as the price of gas from NELP block KG D6, which was US$4.2/mmbtu. From Nov’14, it was linked to price in the US, Russia, Canada and UK. Price under this formula was US$4.2- 5.6/mmbtu in the first 17 months, but US$2.0-4.1/mmbtu thereafter


* ONGC’s gas price outlook: GoI deregulated the price of gas produced from deepwater fields post-Jan’16, coal bed methane, incremental output from NorthEast post-Jul’18 and under development plans approved after Feb’19. This will ensure that price of ONGC’s incremental gas output will be market-determined. We expect a floor price of US$4.2/mmbtu, or that linked to JKM spot LNG (US$4.2- 4.6/mmbtu in FY22-FY26E if US$1/mmbtu discount to JKM) to be soon introduced for APM gas followed eventually by phased deregulation over the next few years.


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