Petronet LNG: Near-term demand concerns

Restarting of fertiliser plants after shutdown might help but price difference between long-term RLNG and spot cargo will keep overall muted for now

Government-owned Petronet LNG is feeling the heat of relatively lower prices, as well as weaker demand. Since it largely procures imported liquefied natural gas on a long-term basis, whose prices are now higher than the spot ones, this has impacted demand and dented the company’s volumes.

This has also reflected in capacity utilisation during the March quarter, the lowest in five years. Some analysts, however, feel utilisation at the Dahej facility, at 74 per cent, has bottomed out and will improve.

The stock has risen about five per cent from its eight-month closing low of Rs 166.70 (April 24) to Rs 174 now. However, the weak demand environment, likely to persist in the near term, might cap any significant upside. The consensus target price of Rs 183 from analysts polled on Bloomberg after the results, also indicates this.

Sachin Mehta at Centrum Broking says, “The price gap of $4-5/mBtu between long-term RLNG (regasified LNG) and spot cargoes is unlikely to narrow in FY16/17 and, hence, will face resistance from end-users/offtakers, leading to lower offtake.” A lower offtake, without take-or-pay revenue provisions, coupled with a possible haircut in regasified LNG rates, pose risks to our earnings, he adds.

For the quarter ended March, Petronet’s earnings were well below analyst estimates. Revenue at Rs 7,162 crore fell 31.3 per cent year-on-year. Operating earnings declined 42.8 per cent to Rs 221 crore. While net profit at Rs 301 crore was up 77.6 per cent, it included a tax write-back of Rs 132 crore. Adjusted for this, profit at Rs 162 crore was down half a per cent, despite boost from higher other income.

The lower utilisation at Dahej was also on the back of lower purchases by fertiliser plants due to shutdowns and due to deferral of purchase of long-term RasGas cargo, down 36 per cent sequentially. Storage capacity constraints were also partly responsible for lower import of cheaper spot cargo, say analysts. Reduced long-term LNG demand led to increased inventory, which meant less flexibility in import of cheaper spot cargo.

Deferral of the RasGas cargo, say analysts at Nomura, eased some pressure. They expect LNG sales to rebound, looking at fertiliser capacities restarting after a shutdown in the earlier quarter. There is less clarity on the policy on LNG for power. The fact that companies might have to forgo margins for supplies to power plants has taken away some sheen from the benefits that might accrue due to increased volumes.

Meanwhile, capacity expansion from 10 million tonnes annually to 15 mn at Dahej is on track and the management expects it to get completed by November 2016. By then, the market will start discounting lower prices of imported LNG, since long-term import contracts are based on a five-year average. The current soft spot prices will accrue benefits from FY17, say analysts.

Analysts at Moody’s expect India’s imports of LNG to more than double to 24 mt by 2020, compared to 10.7 mt in FY14. Given the long-term potential, investors can accumulate the stock on corrections.