New LNG policy: No major benefits for Petronet, GAIL
Analysts say these two will have to forgo part of marketing margins and re-gasification rates, restricting the gains
A cabinet committee’s approval for a mechanism to use regasified liquefied natural gas (RLNG) to improve utilisation of grid-connected gas-based power plants initially provided some euphoria for LNG entities Petronet LNG, GAIL and Gujarat State Petronet (GSPL). Their stocks gained on Thursday but Petronet LNG and GAIL’s gave away the gains on Friday, due to concerns that the companies might have to forgo part of the marketing margins and transmission rate.
While there are other positive triggers for GSPL and so the outlook for the company is positive, the three stocks lagged the broader markets on Monday, when the Sensex was up 1.9 per cent.
Petronet, expanding its LNG terminal capacity, would see improved visibility on demand. Analysts believe this can be a blessing in disguise for the existing high-price contracted LNG imports from RasGas. GAIL, with presence across the entire gas value chain (long-term LNG contracts, stake in re-gasification terminals and ownership of pipelines), would also benefit. However, the amount of benefit now gets limited due to the required concessions on rates and margins from gas sector companies.
Sachin Mehta at Centrum Broking says, “The government’s gas price pooling policy, if implemented, might not be effective. Challenges are seen on all stakeholders, concurring to forgoing revenue in some form or the other.” Analysts at UBS also believe implementation of this scheme could take some time.
The news regarding gas transporters and LNG terminal operators agreeing to discount on rates and marketing margins is likely to limit their volume benefits. Analysts say Petronet has not clearly mentioned it but lower regasification charges and marketing margin might put 20-40 per cent of its FY16 earnings per share (EPS) at risk and could be very negative for the stock. The dual impact will be on Petronet. It will not only charge 50 per cent less for supplies but, since it is operating at full capacity, will mean it could have to forgo some existing more-profitable spot LNG supplies, impacting the EPS further.
Petronet’s share price has fallen 22 per cent from the 52-week high of Rs 221.90 in January. The below-expectation performance in the December 2014 quarter, propelling concerns on lower marketing margins and re-gas cargoes, have contributed. In the near term, some pressure is likely to continue. In the longer run, completion of its Dahej expansion from 10 million tonnes per annum (mtpa) to 15 mtpa by end-2016 will drive volume growth and earnings.
GSPC has already booked another 1 mtpa capacity with Petronet. GAIL, Indian Oil and Bharat Petroleum have booked an additional 2.5 mtpa, 1.5 mtpa and 1 mtpa, respectively, of the expanded capacity coming up at Dahej. Analysts at Elara, in this backdrop, estimate 95.6 per cent of gross margins in FY18 from these contracts. While earnings predictability would improve, the benefits will accrue only in the long run.
For GAIL, while rate and margin cuts could impact earnings by seven to eight per cent, risks on spot gas sourcing remain and the benefits from gas pooling seem more over the medium term, say analysts at UBS. Thus, the new LNG policy for power is negative for the company. Also, low oil prices will remain an overhang on the stock in the interim, say experts.
On the positive side, successful implementation of the proposal would add to GSPL’s benefits. The potential RLNG requirement of 17 million standard cubic metres a day (mscmd, assuming 50 per cent plant load factor for Gujarat-based power plants) is significant versus its current transmission volume of 23-24 mscmd. Hence, GSPL would have immensely benefitted, say analysts at Kotak Institutional Equities.
