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As per media sources, prices of domestically produced natural gas are expected to increase to US$9/mmbtu for nominated fields (from US$6.1/mmbtu) and US$12/mmbtu (from US$9.92/mmbtu) for HPHT fields from October 1, based on the formula determined by the government. During our Q1FY23 update, we had already factored in higher gas prices in H2 and a further gradual decline in FY24E thereafter. However, on the other hand, we now expect falling crude oil prices to impact long term gas contracts (most are crude oil linked) in the medium to long term (FY24E) whereas spot prices continue to stay elevated in the near to medium term. Hence, due to this combination of falling crude oil prices and higher domestic gas prices, we expect a decline in FY24 EPS by around 0.3% to 2.3% for our upstream companies like ONGC and Reliance Industries. Similarly, for our downstream companies in gas sector, a combination of higher domestic gas prices (already factored in during Q1 update), expected softening of long term gas prices and higher spot gas prices, would yield a variable impact on our CGD companies i.e. for MGL (up 1.9% in FY24 EPS), for IGL (down 3.3% in FY24 EPS) and GGL (down 4.6% in FY24 EPS). For mid-stream companies such as Gail, increase in gas prices and decline in crude oil prices would reduce the FY24EPS by ~11.8%. Similarly, for Petronet LNG, the above scenario of higher spot gas prices and falling crude prices would lead to a decline in FY24EPS by 9.4%.

Domestic and spot gas prices to rise but crude prices fall

* Domestic gas prices are revised every six months. Earlier, gas prices for October 1, 2021 to March 31, 2022 were US$2.9/mmbtu and US$6.13/mmbtu (ceiling for deepwater fields). These prices were revised to US$6.1/mmbtu and US$9.92/mmbtu, respectively, from April 1, 2022 onwards. Gas prices are expected to rise to US$9/mmbtu and $12/mmbtu from October 1 as global benchmarks are also trading at elevated levels. Upwards revision in domestic gas prices will benefit upstream companies like ONGC and RIL. Higher spot gas prices would lead to a decline in the petchem volumes and increase the LPG volumes of Gail. Regasification volumes of Petronet LNG would also be impacted. Margins of CGDs like IGL, MGL and Gujarat Gas would decline as their gas sourcing costs would increase

* Revision in gas prices comes at a time when crude oil prices have fallen to ~US$84/bbl on account of a possible recessionary scenario in the west. Decline in crude oil prices would reduce the net oil realisation of upstream companies. However, RLNG prices, which are Brent linked, would also decline. This would reduce the long term gas cost for IGL, MGL and GGL. Hence, the long term volumes of Petronet are expected to increase

* We have already factored in the possible increase in domestic gas prices and its impact on the above companies in our previous estimates. However, the sharp fall in crude oil prices and elevated spot LNG prices, which would negate the impact of increase in domestic gas prices, have now been taken into account

Valuation and Outlook

We maintain HOLD rating on ONGC with a target price of | 135/share. For Reliance Industries we maintain HOLD rating with a target price of | 2685/share. We maintain HOLD rating on IGL, with a target price of | 420/share. For MGL, we maintain HOLD rating with a target price of | 850/share while for GGL also we maintain HOLD rating with a target price of | 480/share. For Gail, we maintain our BUY rating with a target price of | 100/share. For Petronet LNG, we maintain HOLD rating with a target price of | 210/share.

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