Oil & Gas: CGD - Policy Support Eases Cost Pressure By Emkay Global Financial Services Ltd
* The allocation of additional domestic gas, now 94%, to a CGD company’s CNG and domestic PNG requirement (as per media reports) has eased off cost pressures. Earlier, volatility of RLNG prices in the official GAIL-managed pool warranted monthly price hikes. Mahanagar Gas Limited (MGL, not rated) has taken commensurate RSP hikes with Rs10/kg increase in Mumbai CNG RSP from Rs76/kg during the second fortnight of May to Rs86/kg in August. Indraprastha Gas Limited (IGL) and Gujarat Gas Limited (GGL), however, have kept prices unchanged (IGL took little hike in the domestic PNG segment).
* The pooled mechanism seems to be done away with. Now, GAIL would be supplying domestic gas based on its own availability. The additional allocation may have been diverted from the power sector, which could have anyways become suboptimal at USD6.1/mmbtu (GCV) APM gas price curren
* As per our checks, Unified Base Price (UBP) from August 16, 2022, is set at USD6.3/mmbtu GCV and is a mix of APM and other costlier domestic gas. This means, the mix could have deepwater-HP/HT gas and CBG as well. It is not clear if the 94% share would be maintained going ahead when the CGD sector’s volumes would grow further, though it is a material relief in the near term. There is further option to divert more gas from the power and even fertilizer sectors.
* The 6% RLNG blend in the final pooled price would have varying impact depending on the source of gas. If spot LNG blend of USD40-45/mmbtu is assumed, then the implied base price for a CGD entity would be USD8.5/mmbtu versus USD10.5/mmbtu earlier. This implies an Rs9-10/kg reduction in CNG cost in places such as Delhi and Mumbai with 0- 3% VAT. MGL which was in a position to roll-back the hikes taken in the past three months, has reduced it by Rs6/kg (retaining Rs1.5-2.0/scm margins though). IGL and GGL could maintain status quo though.
* However, all three CGDs have term LNG allocations as well, which based on industrialcommercial (I/C) PNG economics can be diverted to CNG-domestic PNG segment to maximize margins or cut RSP further. While GGL’s extensive I-PNG business implies limited room for diversion, MGL has also mentioned it has enough term LNG to cover base I/C requirements. IGL has secured term LNG during H2CY21 on a suo moto basis, and it could have excess supply to divert to priority segments. We believe IGL could be the best placed. At USD15/mmbtu term LNG price, IGL has room for another Rs7-8/kg cut in CNG RSP despite not taking any hikes in the past three months.
* While stock valuation would depend on long-term margin and volume trajectory with oil prices a key determinant of CNG vs. liquid fuel economics, more clarity on longer term gas availability is still needed. We estimate October 2022 APM price at USD9-10/mmbtu, while the current run rate implies USD12-13/mmbtu in April 2023. Hence, if there is any cap on the same (we have assumed USD6.1 as cap), it would be overall positive for the sector. We remain constructive on the sector nevertheless.
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