Likely renegotiation of pricing terms for Gorgon LNG contract between PLNG and Exxon Mobil provides relief to PLNG and its off-takers BPCL, GAIL and IOCL. The radical change in global LNG dynamics call for rejig in terms of the US LNG contracts as well, even as it remains a low-probability event, but could be a material positive for GAIL. Nevertheless, GAIL’s ability to manage its LNG portfolio should limit the negative impact, which is already reflected in current valuations. Reiterate BUY on GAIL and PLNG.
Petroleum minister indicates renegotiation of Gorgon LNG contract: Petroleum minister has indicated renegotiation of pricing for PLNG’s long-term contract of 1.44 mtpa with Gorgon LNG, comparing it with the earlier renegotiation of RasGas contract, but without specifying any detail of change in terms. We note that the lower price of Gorgon contract after renegotiation, presumably closer to RasGas LNG price, allays the concerns around placement of relatively high-priced Gorgon volumes for domestic off-takers in India — BPCL (40%), GAIL (30%) and IOCL (30%).
Media articles suggest >$1/mn BTU reduction in price of Gorgon LNG for offtakers: Unauthenticated media articles suggest that the pricing formula has now been linked to 13.9% of prevailing crude price on DES basis at the port of delivery as compared to 14.5% of 3-month rolling crude price on FOB basis at the port of loading previously. Our calculations suggest that such a change in formula will result in more than $1/mn BTU reduction in landed price of Gorgon LNG for off-takers at prevailing crude prices. It is certainly a positive for off-takers.
Global LNG dynamics call for rejig of the US contracts, even as it stays a low-probability event: A sharp increase in global LNG supply along with a steep correction in prices of liquid fuels has necessitated renegotiation of long-term contracts. The renegotiation of Gorgon contract directly with Exxon Mobil is reflective of a global market shifting in favour of the buyers. In our view, the latter raises the possibility of rejig in the terms of GAIL’s high-priced US LNG contracts as well, even as it remains a low-probability event.
Overseas contracts and domestic fertiliser demand to allay concerns for GAIL’s US LNG volumes: GAIL’s FY2017 annual report suggests that the company has already signed three time-swap contracts to place a portion of the US LNG volumes in CY2018, besides entering into a medium-term contract of 0.5 mtpa with Shell as disclosed earlier; the company is also seeking destination-swap contracts, which could reduce cost by $0.5-0.7/mn BTU as per our calculation. GAIL has also entered into long-term supply contract of 0.5 mtpa with Chambal Fertiliser for its Kota plant recently and may sign more such contracts over the next 2-4 years.
We believe GAIL’s ability to manage its LNG portfolio may reduce risk to earnings from the US LNG volumes and can drive re-rating of the stock, which is adequately pricing in the potential negative impact from the US contracts in the medium term.