Why ONGC, Oil India Are Likely to Come Under Pressure

Shares of ONGC and Oil India are likely to come under pressure from October 1 as natural gas prices in India may fall below $4.2 per mmBtu (million British thermal unit) from $5.18 per mmBtu now according to reports.

As per the mechanism approved in October 2014, price of domestically produced natural gas is to be revised every six months using weighted average or rates prevalent in gas-surplus economies of US/Mexico, Canada and Russia to incentivise exploration in deep-sea.

The next gas price revision will be on October 1, 2015.

“Preliminary calculations based on average price in the gas hubs stated in the formula indicate that the rate from October 1 is likely to be $4.16 or $4.17 per mmBtu on NCV (net calorific value) basis,” Press Trust of India said in a report quoting an Oil Ministry official.

On gross calorific value (GCV) basis, the rate will be about $3.8 per mmBtu as compared to $4.66 currently, the report added.

The gas price cut if happens will be negative for gas producers like ONGC and Oil India although it will be positive for fertiliser producers and Gail.

Analysts say gas price cut will be biggest negative for ONGC and Oil India as their profitability will be significantly impacted due to this. A $1/mmBtu price cut will lower the FY16 earnings per share (EPS) of ONGC by about 5.5 per cent, while Oil India’s EPS will be impacted by 3 per cent, analysts say.

However, a $1/mmBtu price cut will raise GAIL’s FY 16 EPS by 5 per cent and it would be able to report 10 per cent annual growth in EPS for FY16, analysts added.

As of 1.47 p.m., ONGC shares traded 0.33 per cent lower at Rs 238.40 and Oil India shares traded 0.44 per cent lower at Rs 436.85 apiece compared to 0.28 per cent fall in the broader Nifty.