Energy stocks turn attractive as India shifts towards a gas-based economy

By DK Aggarwal

As India marches towards becoming a gas-based economy, the role of gas-producing companies and gas transportation companies assumes a lot of significance.

Various government policy initiatives and other reform initiatives to enhance gas production, promote a nationwide gas grid and set up gas infrastructure will support the oil and gas sector.

Recently, consumption of gas has increased significantly due to increased availability. Additionally, the process of addressing environmental concerns is expected to drive demand for natural gas from industrial users as well as CNG users.

Also, regulatory tailwinds, which earlier used to be risky for the companies, are supporting this space after the Modi government eased norms for the sector.

The government has approved new oil and gas exploration and licensing policy, called Hydrocarbon Exploration Licensing Policy (HELP), in place of the previous policy called New Exploration Licensing Policy (NELP).

HELP has adopted a revenue-sharing model, in which the government will get a share of the oil and gas produced after production begins.

HELP offers a single-licence, revenue-sharing mechanism to replace the multiple-licence, profit-sharing NELP. To encourage gas production from difficult areas, the government has started incentivising and granted marketing rights, including pricing power, and has given freedom to explore gas.

In another measure, Prime Minister Narendra Modi recently announced a Rs 1,000 crore CGD network project for Varanasi. In order to reach the gas to the users, the government has agreed to partly fund a Rs 13,000 crore natural gas pipeline.

The new pipeline will carry fuel to four shut fertiliser plants, three refineries at Barauni in Bihar, Haldia in West Bengal and Paradip in Odisha and provide CNG and piped cooking gas in several cities on the route.

Meanwhile, the government has decided to provide a capital grant of Rs 5,176 crore (i.e. 40 per cent of the estimated capital cost) to GAIL for the development of a 2,539 km long Jagdishpur-Haldia/Bokaro-Dhamra Gas Pipeline (JHBDPL) project to connect Eastern part of the country with National Gas Grid.

Also, the government’s new domestic natural gas price, which is set at $2.5 per unit from October onwards, down 18 per cent from $3.06 per million British thermal unit, is likely to benefit downstream companies, thus helping the government to reduce fertiliser subsidy burden.

All these efforts of the government are expected to enhance domestic natural gas production. Besides the oil and gas sector, fertiliser and power Sectors, which consume about 60 per cent of total consumption, are likely to get the benefit.

The implementation of the Fertiliser Gas Pooling Scheme has resulted in the encouragement of the utilisation of installed fertiliser units in the country and this would develop a gas consumer market too.

The move towards a gas-based economy will not only showcase India’s commitment to climate change as a globally responsible economy, but will als0 draw huge investment to the sector, besides creating jobs.

As far as stocks from the oil and gas space are concerned, at present valuations they look quite reasonable. As valuations in this sector are already benign, it is expected that the downside will limited.

One may start investing in a staggered manner in stocks such as Indraprastha Gas, Mahanagar Gas, Gujarat Gas, GAIL, ONGC, and LNG Petronet.

(The author is Chairman and MD, SMC Investments and Advisors. Views and recommendations given in this section are his own and do not represent those of ETMarkets.com. Please consult your financial adviser before taking any position in the stock/s mentioned.)