Is the worst over for Petronet LNG?

Restarting of fertilizer plants post shutdown may help demand, but the price difference between long term RLNG and spot cargo's will keep overall demand muted in the near term

Petronet is feeling the heat of lower gas prices leading to fewer seekers for higher-priced imported LNG. This has dented Petronet’s volumes as capacity utilisation in the March quarter fell to its lowest in five years. Some analysts say the 74% utilisation at the Dahej facility has bottomed out and see improvement from here on. The stock has bounced back from a 6-month closing low of Rs 166.70 to Rs 175 levels now; however, a weak demand environment that is likely to persist in the near-term may cap any significant upside for the stock. The consensus target price of Rs 183 as per analysts polled on Bloomberg post results indicates that line of thinking. 

“The price gap of $ 4-5/MMBTU between long term RLNG and spot cargoes is unlikely to narrow in FY16/17E and hence it will face resistance from end-users/off-takers, leading to lower off-take,” says Sachin Mehta at Centrum Broking. A lower off-take without take-pay revenue coupled with a possible hair-cut in regas tariffs, pose risks to our earnings, he added.

For the quarter ended March 2014, Petronet’s earnings were well below analyst estimates. Revenue of Rs 7161.7 crore grew 31.3% annually while earnings before interest, tax, depreciation, and amortization (EBITDA) declined 42.8% to Rs 221.4 crore on an annual basis. Net profit of Rs 300.7 crore, though, grew 77.6% on a year-on-year basis, albeit with a tax write-back of Rs 132.3 crore. Adjusted for that, the Rs 162.4 crore profit actually declined half a percent despite a boost from higher other incomes. 

The lower utilisation at Dahej was primarily on the back of deferral of long-term Ras gas cargos, about 10 cargos or down 36% sequentially. Also, lower spot volumes were due to reduced flexibility to import spot volumes due to storage capacity constraints, say analysts. Reduced long-term LNG demand led to increased inventory levels, which in turn led to reduced flexibility to import cheaper spot cargoes. The deferral of Ras gas cargos, according to analysts at Nomura, eased some pressure operationally; they expect LNG sales to rebound looking at the fertiliser capacities restarting post a shutdown during previous quarter.  

The Nomura analysts added that benefits will accrue due to increased offtake of LNG by the power sector. Though LNG demand by fertiliser plants restarting may benefit to some extent, there is less clarity on the policy on LNG for power. The fact that companies may have to forego margins for supplies to power plants has taken away some sheen from the benefits that may accrue due to increased volumes.

The capacity expansions from 10 MMTPA to 15 MMTPA at Dahej remain on track and management expects it to be completed by November’16. This may accrue benefits however not in the near-term again.