India's producer price increase to the highest ever should not only surprise investors but also reduce past decade of skepticism on quality of returns for hydrocarbon producers, foreign brokerage, Morgan Stanley said in a report.
While the hike was in line with our estimates and benefits ONGC, OIL and RIL, Gujarat Gas remains our key underweight, Morgan Stanley said.
In the biannual revision, India's domestic gas prices rose by 40% from US$6.10/mmbtu to US$8.57/mmbtu, in line with domestic gas prices seen in multiple geographies, but slightly above mid-cycle gas prices seen globally for domestically produced gas.
Producer prices for deepwater gas fields were raised by 25% to US$12.50/mmbtu. We think the hike highlights the government's focus on energy security and reduces concerns on domestic gas price caps by the government, considering news flow over recent months.
We expect producer gas prices to decline and average US$6-7/mmbtu medium term as gas markets tighten slightly but keep global benchmark prices at elevated levels,Morgan Stanley said.
The rise in the producer price would necessitate an 8-10% increase in CNG consumer prices regardless of depreciation of the rupee.
While certain players like Adani Gas announced a 4-5% price hike over the weekend, we estimate a staggered increase to follow from the other city gas distributors. CNG gas demand growth has been robust over the past year at an 8% CAGR vs. pre-Covid, despite a 70% price hike by likes of IGL. The CNG price hike should lower the discount to alternative fuels like gas and diesel from 15-40% currently to 15-25%, Morgan Stanley said.
We think higher allocation of domestic gas and flexibility to source its own LNG will help IGL manage its margins better, Morgan Stanley said.