Petronet LNG allays Street's concerns on hydrocarbon investments in US

Details about deal size will be finalised by March, could stretch the company's balance sheet if it goes solo

Petronet LNG’s clarification regarding its non-binding memorandum of understanding (MOU) with Tellurian Inc of the US for gas supplies has allayed some concerns on its proposed hydrocarbon investments in the world’s largest economy. The stock trimmed Monday’s losses and closed 1.31 per cent up on Tuesday. Analysts feel that prima facie the company may not proceed with the investment in absence of gas off-take and other financial assurances from its domestic promoters. Nonetheless, the Street will remain watchful till finalisation of the deal, which is expected by March 2020.

The company’s non-binding MoU envisaging a liquefied natural gas (LNG) purchase contract of up to 5 million tonnes per annum (MTPA) would mean investments of up to $2.5 billion (analysts estimate that right to lift 1 MTPA of gas requires an upfront equity investment of $500 million). Analysts said that Petronet’s FY19 net worth stood at just $1.4 billion and its annual operating cash-flows are in the range of $500 million. This implies that if Petronet decided to invest on its own, any commitment of off-take greater than 1-2 MTPA could be a stress on its balance sheet.

The company, in a call with analysts, clarified that it would enter into a definitive contract only if it gets back-to-back deal with its customers, either its promoters (Bharat Petroleum, Indian Oil, ONGC and GAIL) or other buyers. A 100 per cent back-to-back LNG purchase contract would also mean no apparent pricing risk, feel analysts. However, in the absence of any participation from the affiliates, Petronet may contract (for supply) of 1-2 MTPA of LNG and limit its investment to $0.5-1.0 billion, and it already had cash of $0.5 billion as of end-FY19, point out analysts at Reliance Securities.

On the positive side, the price of gas sourced from its proposed venture with Tellurian is likely to be lower than Henry Hub prices. Rising supplies will be used to meet India’s growing gas demand and would also ensure supply security for Petronet post the expiry of its contracts with RasGas of Qatar.  

Meanwhile, considering Petronet’s consistent growth and accruing gains from corporate tax cuts, its stock scaled a 52-week high on Friday. Analysts at Antique Stock Broking and Reliance Securities maintain their ‘hold’ rating with target price of Rs 272-275 for the stock trading at Rs 256 levels. Consensus target price as per Bloomberg stands at Rs 292.