Markets

Oil and gas stocks skid

Anand Kalyanaraman BL Research Bureau | Updated on March 12, 2018 Published on June 26, 2014

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Gas price hike deferral and status quo on LPG, kerosene subsidies take toll

In an anti-climax yesterday evening, the much-anticipated price hike for domestically produced natural gas, which was to kick in from July 1 did not materialise.

The Government had deferred the matter by another three months until September end. Also, it had clarified that it was not considering a hike in the price of subsidised LPG cylinders and kerosene.

Pricing reforms

The monthly diesel price hike over last year, which were carried forward by the new government, had raised expectations that the pricing reforms process in the sector would be continued.

Oil and gas stocks had rallied sharply over the past few months on these hopes. Not surprisingly, stocks in the sector have reacted badly to yesterday’s deferral on the gas price hike and status quo on LPG and kerosene subsidies.

The biggest losers are the public sector hydrocarbon explorers ONGC and Oil India which have fallen nearly 5 per cent and 4 per cent, respectively. These companies account for almost 80 per cent of the gas produced in the country.

It was estimated that the near-doubling in the prices of gas as per the Rangarajan Committee’s recommendation could have added ₹8,000 crore to ONGC’s annual profit and ₹1,000 crore to Oil India’s bottom line — that’s about 30 per cent of these companies’ consolidated profits in 2013-14.

The stock of Reliance Industries (RIL), embroiled in a long-running pricing dispute with the previous government, has fallen 2.5 per cent. The gas price hike for RIL, if it had happened, was subject to the condition that its bank guarantee for the incremental price benefit would be forfeited if the company was found guilty of deliberately suppressing output at the KG-D6 field.

Public sector oil marketing companies (OMCs) – Indian Oil, HPCL and BPCL – which incur under-recoveries in the first place due to selling fuel below cost, also lost between 3-4 per cent on the bourses.

Diesel under-recoveries

With no move to moderate the subsidies on LPG and kerosene, under-recoveries on fuel will continue to remain high. In 2013-14, even as diesel under-recoveries fell 32 per cent thanks to the regular price hikes, those on cheap LPG cylinders and kerosene increased 4 per cent and 17 per cent to ₹30,574 crore and ₹46,458 crore, respectively.

These numbers could get worse in the current year if the crisis in Iraq, which has already led to a spike in crude oil prices, worsens.

Higher under-recoveries also bode badly for ONGC, Oil India, and gas transmitter GAIL (India) which bear a chunk (40-50 per cent) of the burden by providing product discounts to oil marketing companies. The GAIL stock is also down 1.5 per cent.

Published on June 26, 2014
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