Gains ahead for gas companies as LNG price crack 65% in 6 months

Lower prices should benefit all the players in the gas distribution value chain

Liquefied Natural Gas (LNG) prices have been falling sharply over the last few months on short term demand concerns. Short-term LNG FOB (free on board) prices are down 65 per cent over the past six months to $4.25 million British thermal units (mmbtu), close to the three-year lows. While some analysts feel that the slump is due a fall in imports from China, which is largest importer of LNG globally, some feel that the large capacity additions are likely to keep the LNG market subdued over the medium term as well. 

The fall in LNG prices however is positive for city gas distribution (CGD) players such as Gujarat Gas, Indraprastha Gas (IGL) and Mahanagar Gas. Crisil Research says that an expected 5-7 per cent increase in consumption of piped natural gas (PNG) and compressed natural gas (CNG) should improve operating profit margins of CGD companies by 250-300 basis points (bps) in the first half of fiscal 2020.

The ones having higher exposure to industrial segment are to benefit more as prices of natural gas will become competitive to other industrial fuels. Further the gas-based power pips imported coal as LNG is available at Rs 3.65/KWhr compared with imported coal at Rs 4.20/KWhr and therefore more competitive. 

Given the fact that Gujarat Gas caters to majority of industrial demand in Gujarat, it remains a significant beneficiary. 

Indraprastha Gas which supplies to Delhi National Capital Region remains a beneficiary too. Meanwhile increased demand of gas benefits gas transmission and pipeline players. Analysts at Edelweiss believe GSPL could log strong gains as it has the largest exposure to short-term volume contracts transmitted through its pipelines. 

Analysts at IDBI Capital on the other hand expects Petronet LNG and Gujarat Gas to benefit most in the near-term under the current scenario of lower LNG prices and higher liquid fuel prices. The stocks of Gujarat Gas, IGL, Mahanagar Gas, Petronet LNG are all trading near their 52-week highs, while GSPL and GAIL have rebounded 13-20 per cent from their lows in February. GAIL being the largest transporter of gas should also benefit though some analysts feel that GAIL faces some risk of defaults by customers in the long term.