Rising spot LNG prices are a risk to earnings of Petronet LNG (PLNG) especially if spot prices exceed oil parity. Indian demand for spot LNG is likely to decline in that case. Japanese LNG demand surged as 80% of its nuclear power capacity is offline due to government-mandated stress tests after the Fukushima disaster.
The timing for approval and restarts is uncertain. Asian spot LNG prices are therefore up to $17/mmbtu (million metric British thermal units) and may rise to $25/mmbtu, in a worst case, if all reactors shut down.
PLNG has gained from decline in K-G D6 gas output over the last 12 months. As K-G D6 volumes declined PLNG?s utilisation rate improved from below 80% in H1FY11 to 100% by Q4FY11 and 107% by Q1FY12. PLNG has long-term LNG contract for just 7.5 mmtpa (million metric tonnes per annum)and short-term contract for another 1.4mmtpa but operated at annualised rate of 10.7mmt in Q1FY12. Thus, 17% of its imports in Q1 were spot LNG. PLNG?s regas charge is higher on spot and short-term volumes than on long-term volumes. Thus, any decline in spot volumes would hit its volumes as well as regas charge. We see risk to PLNG?s Q3 and Q4 FY12 volumes and earnings from rising spot LNG prices.
Despite near-term concerns we have raised PLNG?s price target by 14% to R133 as we have changed longer term regas charge assumptions, which were conservative. Our revised price target still implies 16% potential downside. We retain Underperform rating on PLNG.
Our Underperform is due to our view that (i) PLNG?s long-term volume growth prospects are poor, (ii) its regas charge may decline sharply from FY08 level, (iii) LNG price under its existing 25-year contract may rise to level at which adequate demand is not present. PLNG has not tied up any long-term contract since its first contract in Dec’99 as LNG prices (linked to oil) have risen in line with oil price. Gas discoveries have been made in India whereby consumers are unwilling to pay a high price for gas.
Our discounted cash flow-based price objective of PLNG is R133/share. WACC (weighted average cost of capital) used is 10.8%. It is based on the assumption that PLNG gas volumes would rise from 8.8 mmt in FY11 to 15 mmt by FY15, PLNG regas charge is at levels that ensure a ROE (return on equity) of 20%.
Kochi LNG terminal is assumed to start in end-FY13 and ramp up to 2.5mmt in FY15 and 5mmt in FY18. Regas charge, which was R31.7/mmbtu in FY11, is assumed to be R34-39.9/mmbtu during FY12-FY16e and R40.1-60.3/ mmbtu thereafter.
Upside risks include PLNG LNG volumes are higher than assumed by us. Downside risks include PLNG volumes are lower than assumed by us.
?BofA ML