State-owned Oil and Natural Gas Corp logged a Rs 4,000 crore loss on natural gas output in the previous financial year as the government mandated price for the fuel was less than the cost of production.
Why is this important?
The prices of natural gas are regulated by a new mechanism approved by government in 2014. As per the mechanism, the price of natural gas is revised every six months – April 1 and October 1, using weighted average rates in gas surplus markets. The prices were revised to $3.06 per MMBtu from $2.89 in April 2018.
ONGC’s average cost of production is about $ 5.14 per mmBtu and $ 3.59 per mmBtu without considering return on capital. ONGC is demanding a floor or minimum price of natural gas be fixed at $4.2 per mmBtu for the business to make economic sense.
At the current prices, gas production is no more encouraging a business for ONGC. ONGC is considering to postpone the $1.5 billion projects in KG basin and Gulf of Kutch. These two projects are likely to have combined output of 8 mmscmd which is 14% of current production of 60 mmscmd.
How the stock will be impacted?
India is thrusting upon increasing share of natural gas in its commercial energy mix. Hence, it is highly unlikely that ONGC would make any cuts in production of natural gas. ONGC is likely to sustain losses in its gas segment if the gas prices are not revised. However, the amount of loss is likely to decline as there has been an upward revision in gas prices.
ONGC (CMP 172.6, M Cap Rs 2,21,694 crores, PE 9.2x FY20E)