Petronet LNG (PLNG) has reached a new pricing agreement for an existing 25-year contract (ending FY28) with Qatar’s RasGas Co., which as largely anticipated will lower the price of long-term LNG from Qatar (RLNG) by almost half starting January 1, 2016. The new agreement comes as a big relief to all parties in the LNG value chain including GAIL, PLNG, IGL and Gujarat Gas. However, we believe the GAIL and PLNG stocks have already rallied excessively in anticipation of price relaxation, more than pricing in the potential NPV benefits from the deal, while IGL will structurally benefit from higher city gas volumes. We, therefore, maintain ’HOLD’ on GAIL, re-iterate ’REDUCE’ on PLNG and ’BUY’ on IGL.
The new contract approves for the remaining term of 13 years: 1) RLNG prices from Qatar will maintain the same level of indexation (12.67%) to “near-term” oil (compared to a 5- year oil linked floors and caps earlier) as against earlier anticipation of higher indexation; 2) RasGas will waive the shortfall penalty of USD1.5bn for 32% shortfall in CY15; and 3) an additional annual supply of 1MMT RLNG for remaining part of the contract from RasGas.
As per the new formula, RLNG prices will be revised lower in the near term (media reports: $6-7/mmbtu compared to $12.5 currently). This should benefit GAIL as it consumes RLNG as feedstock for its petrochemical business.
Lower RLNG prices shall also benefit end consumers including city gas players (IGL and Gujarat Gas). Both GAIL and PLNG will benefit from removal of take-or-pay overhang (we had assumed 50% exposure for GAIL and ‘nil’ for PLNG) while PLNG earnings will be positively impacted by higher contracted volumes (by 1MMT) and savings related to demurrage charges on its idled cryogenic LNG carriers.
Overall, we expect potential NPV benefits of Rs 30/share for GAIL (Rs 25/share from penalty waiver and Rs 5/share NPV benefit from higher petrochemical earnings) and R10/share NPV benefit for PLNG on potentially higher volumes.
On anticipation of pricing relief (highlighted by press articles and oil ministry since November 10), both the GAIL and PLNG stocks have already rallied excessively compared to expected NPV benefits (GAIL has rallied by Rs 90/share and PLNG by Rs 60/share). We, therefore, believe potential benefits from the new deal are already priced in.
Also, unlike the earlier formula based on long-term moving averages, the new arrangement will more closely reflect the prevailing oil prices and therefore not provide buffer against an expected oil price recovery impacting GAIL’s petrochemical profitability and may again lead to shortfall from end consumers, if the RLNG prices increase exceedingly against spot LNG. We, therefore, maintain ‘hold’ on GAIL, ‘reduce’ on PLNG and ‘buy’ on IGL .