Gas price cut to benefit utilities

Domestic gas prices will stand reduced by 20 per cent to $3.06 per mBtu (million British thermal units) for April-September, as determined by the administered pricing formula that tracks a basket of international oil and gas prices.

This is not good news for gas producers, more so for ONGC (Oil and Natural Gas Corporation) and Oil India, rather than for private firms like Cairn India and Reliance Industries, given the small contribution of gas to their revenues. The biggest impact will be borne by ONGC and Oil India, which supply about 75 per cent of the domestic gas.

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The 20 per cent cut in domestic gas prices will translate into a reduction of Rs 0.5-1.5 per scm (standard cubic metre) in piped natural gas (PNG) prices for domestic customers and a Rs 0.8-1.5 per kg cut in compressed natural gas (CNG) prices, says India Ratings and Research. The gas producers will see an impact of Rs 3,000-3,200 crore in revenues (and almost equally in profits) during the first half of FY17, says the agency.

Analysts at Religare Institutional Equities say that the new price comes close to the cost of gas production for ONGC and Oil India, which is about $3 per mBtu. Not surprisingly, their stocks fell 0.5-1.4 per cent on Thursday. The decline wasn't significant as the Street was already factoring in the gas price cut in their estimates. Reliance Industries' stock ended in the green at Rs 1,045.

On the other hand, lower gas prices are good for gas distributors and utilities. For GAIL, it will have a positive effect on demand, leading to higher pipeline use. GAIL's LPG (liquefied petroleum gas) business margins can expand up to 10 per cent, say analysts. The re-negotiated price for imported gas from RasGas (Qatar) is already benefitting GAIL.

For gas consumers, blending domestic gas with LNG, depending on their respective domestic gas allocations, will also be positive. Blended costs could decline by up to 10 per cent, say analysts at Religare who add that benefits will be larger for power companies (most are highly price-sensitive).

IGL (Indraprastha Gas Ltd) and Gujarat Gas would benefit but gains for IGL will be higher given that domestic gas accounts for 70 per cent of its total gas needs. Domestic gas accounts for only 20 per cent of Gujarat Gas's needs. The extent of the cut in retail prices of CNG and PNG will decide the margin expansions for IGL. The IGL stock gained 3.5 per cent to close at Rs 569 on Thursday.

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