Oil stocks rise on Kirit Parikh panel recommendations; IGL, IOC gain up to 4%

Shares of oil and gas companies saw a surge in buying activities on Wednesday, with the S&P BSE Oil & Gas index hitting a 52-week high in intraday trade amid a report that the draft recommendations of the Kirit Parikh Committee are likely to provide respite to the natural gas sector. Shares of city gas distribution (CGD) companies such as Indraprastha Gas (IGL) and Mahanagar Gas (MGL) rose up to 4%, while index heavyweights Reliance Industries, Adani Total Gas, Indian Oil Corporation (IOC), and Oil and Natural Gas Corporation (ONGC) also among notable gainers.  

The S&P BSE Oil & Gas index rose as much as 1% to hit a record high of 20,650.60 points during the session, while the benchmark Sensex climbed 500 points to hit a fresh high of 63,182 levels. IGL was the top performer in the oil and gas space, rising 4.16% intraday, whereas IOC, Adani Total Gas, RIL, and GAIL (India) rose up to 2%. Among others, BPCL, HPCL, ONGC, Petronet LNG and Gujarat Gas settled with modest gains.

As per the media report, the panel, set up by the government to review the gas pricing formula, may suggest a ceiling price of $6.5-7 per metric million British thermal units (mmbtu) for domestic gas, which could be increased by $0.5/mmbtu every year and could eventually be market linked by the end of the 4th year.

“If implemented, this move would be positive for downstream companies such as IGL, MGL and Gujarat Gas, and marginally negative for ONGC (neutral for RIL),” ICICI Direct Research said in a report.

The agency expects lower sourcing costs (₹6-8 per scm) to benefit the city gas distribution companies on the margin front to an extent and the rest be passed onto to customers (raising lucrativeness of CNG, PNG over alternate fuels). “Thereby, we expect a 10% increase in FY24E EPS for IGL, an 18% increase in FY24E EPS for MGL and an 8% increase in FY24E EPS for Gujarat Gas. For high pressure, high temperature (HTHP) fields, we expect an element of pricing freedom to encourage continued investments in that field,” it said.

Current domestic gas prices for the old fields stand at $8.57/mmbtu (GCV), which was revised from $6.1/mmbtu on October 1. “This led to an increase in the gas sourcing cost of IGL, MGL and Gujarat Gas and impacted their margins. Although these companies have taken price hikes, they aren’t sufficient to pass on the increase in gas costs,” the report noted.

As per the report, if prices get revised to $6.5/mmbtu (suggested by Kirit Parikh panel), the gas sourcing costs for CGDs would decline by $2/mmbtu, which may improve their margins and lower the CNG and domestic PNG sales price.

Besides, the decline in international Brent crude prices is also a positive development for Indian oil marketing companies (OMCs) as falling prices have narrowed their marketing losses. The crude prices have fallen to $85 per barrel on the back of strict Covid lockdowns in major cities of China; the European Union’s price cap of $65-70/bbl on Russian crude exports (Link); and the recent gasoline (petrol) inventory build-up in the U.S.