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ONGC Gains as Gas Price to Add $1 Billion in Revenue

Ambika Soni, India's information and broadcasting minister
Ambika Soni, India's information and broadcasting minister, arrives at the Indian Parliament in New Delhi. Photographer: Pankaj Nangia/Bloomberg

Oil & Natural Gas Corp., India’s biggest explorer, rose the most in a year after Chairman R.S. Sharma said higher gas prices will add 50 billion rupees ($1 billion) in revenue and curb losses from its aging fields.

ONGC surged 9.1 percent, the most since May 18, 2009. The government’s decision yesterday to more than double prices will help ONGC stem annual losses of about 48 billion rupees from its gas business, Sharma said in an interview in New Delhi yesterday.

Higher prices may lift ONGC’s annual profit 16 percent, the biggest increase in five years, according to four analysts. The first gas price rise since 2005 comes as global explorers including Exxon Mobil Corp and BP Plc are competing to invest in a field controlled by state-run ONGC.

“This decision signals the start of reforms in terms of fuel pricing in India,” said Mahesh Patil, who helps manage about $16 billion in debt and equity, including ONGC and Oil India Ltd. shares, at Birla Sun Life Asset Management Co. “ONGC’s valuations will increase and investors will definitely be interested in buying. The stock could get re-rated.”

The price of gas will be increased to 6,818 rupees per thousand cubic meters from 3,200 rupees, Information Minister Ambika Soni told reporters in New Delhi after a cabinet meeting yesterday. That’s equivalent to $4.20 per million British thermal units for customers, said Apurva Chandra, joint secretary in the oil ministry.

New Price

The new price will come into effect as soon as the oil ministry informs the companies of the cabinet decision, Oil Secretary S. Sundareshan said today. Higher tariffs will be valid until March 31, 2014, Chandra told reporters yesterday.

The revised price almost equals the rate set by the government in September 2007 for gas produced from India’s biggest field in the Krishna Godavari basin, operated by Reliance Industries Ltd. The price of $4.20 per million Btu includes a 10 percent royalty payable to the government, Chairman Sharma said.

ONGC gained 93.55 rupees to 1,118.65 rupees in Mumbai, after rising as much as 11.4 percent. The benchmark Sensitive Index of the Bombay stock Exchange rose 0.7 percent. Oil India, which was also allowed to increase gas prices, climbed 97.05 rupees, or 8.4 percent, to 1,259.75 rupees, the biggest advance since Sept. 30, when it listed.

Valuation Impact

“It’s absolutely great for their bottom line, which may rise by about 15 to 16 percent,” Rohit Ahuja, a Mumbai-based analyst for Centrum Broking Ltd., said yesterday. Ahuja’s profit estimates were shared by analysts Rohit Nagraj of Prabhudas Lilladher Pvt., Deepak Pareek at Angel Broking Ltd. and Vinay Nair of Khandwala Securities Ltd.

“ONGC’s valuations could rise by about 100 rupees a share purely because of the gas price,” said Nair, who raised the explorer’s stock rating to “buy” from “add” with a target price of 1,300 rupees.

Saeed Jaffery, a Mumbai-based analyst with Ambit Capital Pvt., raised ONGC to “buy” from “hold.” Kumar Manish at HSBC Holdings Plc maintained his “neutral” rating and increased the target price to 1,240 rupees.

ONGC posted a 3.4 percent decline in net income to 161.26 billion rupees for the financial year ended March 2009. Profit for the nine months ended December 2009 fell 6.7 percent from a year earlier to 129.91 billion rupees, according to data compiled by Bloomberg. The New Delhi-based explorer is due to report full-year earnings May 28.

Power, Fertilizer Plants

About 90 percent of the gas produced by ONGC and Oil India is used by power stations and fertilizer plants. The price will increase the cost of electricity marginally and have no impact on fertilizer costs, Information Minister Soni said.

The revision will encourage further investment in exploration and production, the government said in a statement released after the cabinet meeting.

“This definitely feels good coming after all these years,” said D.K. Sarraf, finance director at ONGC. “We will start making a small profit on our gas business.”

ONGC produces about 50 million cubic meters a day of gas from fields awarded to it before the government started auctions in 1999, Sarraf said.

Reliance Industries sells gas from the KG-D6 field to customers selected by the government at $4.20 per million Btu, excluding transportation costs and taxes.

India is considering the recommendations of a panel headed by Kirit Parikh, a former member of the Planning Commission, which said in a report on Feb. 3 that the government must free gasoline and diesel prices from state control and increase kerosene and cooking gas rates to help develop a viable fuel pricing policy.

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