New policy provokes no change in oil, gas explorers’ valuations

New Delhi, March 14 (IANS) Following the government announcement of major reforms in India’s oil and gas sector, analysts said explorers stand to benefit in the long term, but were cautious on stock ratings. The potential impact of policy changes was not enough to change valuations significantly, they said.

“We view the much-awaited hydrocarbon policy, HELP, as a positive for kickstarting investments in the sector, though the benefits to exploration and production (E&P) firms will certainly be back-ended,” global investment, banking firm McQuarie said in a note.

Keeping to a “Neutral” rating on the state-run Oil and Natural Gas Corp (ONGC) stock, and a “Buy” on Reliance Industries Ltd., Nomura Financial Services said: “In our view, these changes will not make investment in upstream E&P (which have suffered for last several years) enticing enough to attract new investments, particularly in the current low oil/gas price environment.”

“The fact that these moves are not enticing was also reflected in the muted stock reaction,” Nomujra said, adding: “New gas price formula not very enticing at low oil prices.”

HSBC Global Research retained “Hold” ratings on both ONGC and RIL, with unchanged target prices of Rs.233 and Rs.1,002, respectively.

“Government announces several policy changes in the upstream sector including marketing and pricing freedom for production from difficult geologies,” HSBC Global Research said.

“We believe the move stands to benefit both ONGC and Reliance Industries but not enough to change our valuation meaningfully,” it added.

The union cabinet last week approved a new oil and gas exploration policy and defined the pricing norms for existing and new discoveries made in difficult areas. Contracts for 28 old blocks were also extended. The new exploration policy will now be based on a revenue-sharing model, as opposed to cost-and-output-based norms earlier.

The new pricing policy for difficult to exploit deep-water and ultra deep-water gas discoveries that are yet to reach commercial production, allows free pricing, subject to a celing based on prices of alternate fuels.

The bulk of such fields are with Reliance Industries and state-run Oil and Natural Gas Corp.

“While implied prices at current spot rates could be higher than prevailing gas prices in the country, these may not be as high as earlier anticipated, and it is unlikely that major producers would see a significant near-term pick up in deep-water output,” JP Morgan said.

“The government has announced fourkey policy decisions relating to the oil and gas space, which, in our view, are likely to encouragelong-term production,” Morgan Stanley said.

“However, any near-term impact on earnings/production is unlikely to be meaningful,” it added.

A clause in the decision has the caveat that if there are pending arbitration or litigation cases pertaining to such assets, the new policy shall only become applicable upon the conclusion or withdrawal of legal proceedings.

Besides the arbitration on gas price, RIL has approached arbitration over the government disallowing costs of $2.3 billion on grounds of shortfall in production.

“Producers engaged in arbitration on pricing with the government would not receive the new price until the arbitrations are concluded – potentially leaving RIL out of this measure in the interim,” said JP Morgan.

Edelweiss feels the new gas price formula could be positive in the long run for ONGC and Reliance “but the exact impact is difficult to gauge”.

“Near term, there will not be any PAT benefit as projects take 3-4 years to commence production (after discovery),” it said.

According to ICICI Securities, “if the global low oil and gas price environment continues, gas price under prevailing formula for existing production may halve over the next 12 months and hurt ONGC-OIL’s earnings outlook.”

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