Oil & Gas shares in focus: MGL hits 52-week high; ONGC, IGL jump up to 3%

Shares of oil & gas companies were in focus and trading higher by up to 4 per cent on the BSE in Monday’s intra-day trade after the Government of India accepted several key recommendations made by the Kirit Parikh Committee with respect to the pricing of natural gas produced from the administered pricing mechanism (APM) fields, that are legacy fields and largely held by PSUs like ONGC.

Going forward, natural gas produced from legacy fields will be priced at 10 per cent of the Indian crude basket’s price, subject to dynamic floor and ceiling prices.

The move is expected to reduce by 10 per cent the prices of piped natural gas (PNG), supplied to households, and compressed natural gas (CNG), used as auto fuel and by various industries, the Business Standard reported.

According to analysts at ICICI Securities, the step would ease pressure on city gas distribution companies (CGDs) as their margins were impacted by earlier sharp rise in domestic gas prices. The move is more positive for Indraprastha Gas (IGL) and Mahanagar Gas (MGL) as their segmental revenues are dominated by CNG and domestic PNG volumes, which are prioritised for the use of APM gas. The cash flow certainty for these companies would also improve, going ahead.

On the upstream front, a revision in gas prices would reduce both Oil and Natural Gas Corporation (ONGC) and Reliance Industries’ gas realisation when compared to the previous six months but is still remarkably higher than what they were earning historically. This pricing mechanism would provide stability to their realisations as well, the brokerage firm said in sector report.

Among the individual stocks, MGL rallied 4 per cent, hitting 52-week high at Rs 1,024.40 on the BSE in intra-day trade. Shares of ONGC were up 3 per cent at Rs 155.20, followed by IGL (2 per cent at Rs 472.70) and Oil India (up 1 per cent at Rs 257.70) on the BSE in intra-day trade. Reliance Industries traded 0.11 per cent lower at Rs 2,338, after opening at Rs 2,346. In comparison, the S&P BSE Sensex was up 0.04 per cent at 59,855 at 10:38 am.

However, according to Motilal Oswal Financial Services (MOFSL), the new pricing mechanism will be negative for CGDs as it raises the gas cost to $6.5/mmBtu as long as the Indian crude basket is above $65/mmBtu. In the older APM pricing regime, we would have expected a sharp correction as US HH has already come down to ~$2/mmBtu. The new mechanism is positive for ONGC/Oil India as the floor price is higher than their cost of production, vis-à-vis selling gas at much lower realization than the production cost for a long time in the older regime, the brokerage firm said in sector update.

MOFSL reiterate its Sell rating on IGL as the threat posed by EVs to the long-term growth potential of the company poses a huge risk to its valuation. “We reiterate our Buy call on MGL, given its attractive valuations. Gujarat Gas remains our preferred pick among CGDs due to its higher industrial exposure,” the brokerage firm said.