According to International Gas Union (IGU), 92mmtpa of liquefaction capacity was under construction as of Mar’18, almost 31% of total trade in 2017. Consumption in Japan, the largest importer of LNG, is likely to decline. China and India are expected to be the major drivers of consumption.
Higher incremental supply is likely to result in increasing glut, keeping LNG prices favourable. With a glut in natural gas production, the slope of Henry Hub to WTI has crashed from 13% to 6.5%. We expect a similar trend in spot LNG prices with expansion in global glut. Lower slope to oil would be beneficial for LNG consumers and, in turn, for PLNG.
Despite the inauguration of GSPC’s Mundra LNG terminal, we have not seen any volume there, so far. H-Energy’s FSRU also appears delayed to mid-2019. Domestic gas production has also been lagging projections. Additionally, a significant amount of incremental gas production is expected to come from difficult fields (RIL’s KG basin, ONGC’s KG-DWN-98/2, ONGC’s S1/Vashistha). These are expected to fetch a price that would be closer to LNG.
The stock is trading at 11.1x Dec’20 EPS of `20.1 and 6.6x Dec’20 EV/Ebitda. We value the stock using DCF (WACC of 12%, terminal growth of 3%). With a target price of `317, we reiterate our ‘Buy’ rating on the stock.
Key triggers to watch out: (i) progress on the completion of Kochi-Mangalore pipeline, (ii) ramp-up of domestic gas production and (iii) progress of Dahej expansion from 15mmtpa to 17.5mmtpa. Deployment of cash remains a challenge in the absence of commensurate imminent projects. However, management has shown prudence in terms of shortlisting of prospective projects. Dividend payout is also likely to remain high in the absence of imminent cash outgo on projects.