GAIL biggest beneficiary of lower RasGas prices

Company will see increased transmission volumes and higher petchem profitability

The news that Petronet LNG is negotiating with RasGas to change the pricing mechanism of the natural gas it imports from the latter boosted market sentiment towards gas transmitters and distributors.

Reports suggest Petronet and the Qatar-based  company are planning to amend their long-term contract by linking it to the three- month average of crude oil prices from the earlier 12 months. If this materialises, the gains will be significant as the price of imported gas will drop below $7 per million British thermal unit (mBtu) from $12.5 per mBtu.

Sachin Mehta of Centrum Broking says the positive outcome on renegotiation of long-term RasGas contract with a reset in re-gasified liquefied natural gas pricing mechanism would result in reduction in gas prices by $5-6 per mBtu.

Ever since oil and gas prices have turned bearish, players in the industry have been taking a beating as imported gas prices were substantially higher as those were based on long-term average, whereas the spot natural gas prices had plummeted. Thus, the demand for the costlier imported gas declined significantly, impacting the revenues and profitability of gas transmitters and distributors.

Leading players such as GAIL and Petronet LNG saw analysts cutting their earnings estimates; as a result, stock prices too fell. However, the latest news has given them a fresh leash of life. GAIL gained 10 per cent on Friday and closed at Rs 348.80 a share, while Petronet was up 6.8 per cent at Rs 220.10.

Other major gainers include Gujarat Gas (6.04 per cent to Rs 514) and Indraprashtha Gas (3.88 per cent to Rs 482.15). Both these companies buy imported gas and now would benefit as their costs decline. Volumes, too, should rise as customers will now find the gas price more affordable.

Analysts believe any such contractual renegotiation providing relief to Petronet LNG and GAIL would also benefit end consumers such as NTPC and other gas-based power producers. However, major benefits will flow to traders, transmitters and distributors of gas like GAIL.

Apart from witnessing increased transmission volumes, GAIL will benefit from lower feed-stock prices as it currently uses costlier natural gas for producing petrochemicals (petchem). A few days ago, analysts at HSBC had highlighted that low petrochemical prices and potential take-or-pay obligations on term LNG would remain an overhang on GAIL’s stock prices.

But, with GAIL’s petchem profitability set to get a boost, Mehta says it also abates concerns on take-pay liability from the RasGas contract. The Qatar government is believed to have agreed not to levy any take-or-pay liability for 2015, estimated at $1.5 billion, due to lower off-take.

Analysts estimate an addition of Rs 4.5-8 per share to GAIL’s earnings per share due to all three benefits. Petronet will also benefit due to the assurance in off-take of volumes and removal of a key overhang, say analysts at Kotak Institutional Equities. The earnings benefit is pegged at Rs 3.5 a share by some analysts.