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Petronet LNG (PLNG)
Energy
No gas; only pipelines and terminals. We view the recent shelving of plans to set up
LNG-based power plants as validation of our concerns about acceptance of high-priced
LNG in the crucial power sector. As per recent media reports, (1) NTPC has abandoned
its expansion plans for its Kayamkulam plant and (2) Karnataka state government is not
comfortable about signing a GSPA with GAIL for the Bidadi power plant given the high
price of LNG. The recent spike in spot LNG prices and India’s inability to tie up longterm
LNG has compounded the problems. We retain our SELL rating on Petronet LNG
with a target price of `100.
Power plants baulk at the prospect of high-priced imported LNG
As per Petrowatch, (1) NTPC has abandoned its expansion plans for its Kayamkulam plant given its
inability to sign power purchase agreements (PPAs) with state governments of Tamil Nadu, Andhra
Pradesh, Kerala and Karnataka. NTPC had signed a gas supply agreement with GAIL for 1.2 mtpa
of LNG from PLNG’s Kochi terminal with a linkage of 14.5% to JCC. This would have resulted in
cost of power of Rs6.5/Kwh. (2) The Karnataka government has expressed its discomfort with the
high price of imported LNG for its Bidadi power plant. We view these developments as validation
of our long-standing view that power sector is highly sensitive to the price of imported LNG (see
our note ‘Concerns on high-priced imported LNG emerge’ released on February 21, 2011).
Imported LNG at US$13-14/ mn BTU (delivered) translates into power cost of ~`5/Kwh
Exhibit 1 gives a comparative analysis of cost of power based on different fuels (coal, domestic
natural gas, imported LNG and naphtha). We compute cost of power at ~`5/Kwh assuming
current LNG prices (delivered) of US$13-14/mn BTU. This is significantly higher versus other fuels
like imported coal and domestic gas and is closer to the price of naphtha. The recent
abandonment of plans by NTPC and concerns of the Karnataka government regarding the Bidadi
project reflect users’ concerns about the high cost of power based on imported LNG.
Troubles in Japan + no long-term contracts = spot of bother for India
We highlight that India has signed long-term contracts for LNG for (1) 7.5 mtpa with RasGas and
(2) 1.25 mtpa with XOM from Gorgon compared to its end-CY2012 LNG capacity of 24 mtpa. This
would make India dependent on spot LNG for a significant chunk of its LNG capacity, which would
make it vulnerable to unforeseen events. The recent events in Japan will compound the problems
for India in two ways—(1) ability to source LNG cargoes given likely spurt in demand from Japan
(see our March 22, 2012 comment titled Running of low gas and (2) high price of imported LNG,
which will impact its acceptability in India.
Higher risks to PLNG’s earnings
We maintain our SELL rating on the stock with a 12-month DCF-based target price of `100
noting (1) the stock offers 17% downside from current levels and (2) potential downside risk
to earnings from an unfavorable macro-environment. We model PLNG’s re-gasification tariff
to increase by 5% in each year in FY2012-14E and remain flat thereafter.
A proposal to pool prices may result in lower ‘pooled’ prices for end-consumers and increase
LNG’s acceptance by pooling expensive LNG with cheaper domestic gas. However, we view
the proposal as retrograde in that it subsidizes expensive imported LNG with cheaper
domestic gas. This may affect the chances of further price increases for domestic gas, which
is unlikely to find favor with the domestic gas producers. More important, we see no reason
for domestic producers of gas to be penalized for the incompetence of companies that have
failed to secure long-term contracts of LNG at reasonable prices.
Also, India’s failures to convert potential opportunities have resulted in sudden (actually, not
so sudden) supply problems. As example of India’s failures, we highlight (1) an inability to
secure LNG for NTPC’s power plants from Petronas given RIL’s superior bid in an
international competitive bidding; Petronas’ bid at $3.5/mn BTU in 2003 was higher than
RIL’s bid of US$2.34/mn BTU, (2) inability to source gas from Iran despite negotiations from
the mid-1990s and (3) inability to secure supply from Myanmar despite owning stakes in
two gas blocks in Myanmar; the same gas is being exported to China.
We discuss the key assumptions behind our earnings model below. We note that we may
be been generous with our assumptions of (1) volumes and (2) re-gasification tariffs (see
Exhibit 2).
Volumes. We model contract LNG volumes at 7.5 mn tons, 7.5 mn tons and 8.4 mn tons
in FY2011E, FY2012E and FY2013E. We model spot LNG imports of 1 mn tons in
FY2011E, 2.5 mn tons in FY2012E and 2.5 mn tons in FY2013E.
We assume Kochi project to be commissioned by FY2013E. We highlight that the Kochi
terminal will have to rely on spot LNG cargos until it starts receiving contracted LNG from
the Gorgon project (likely to be commissioned in CY2015/16E). We see downside risks to
our volume assumptions for Kochi terminal from (1) delay in Gorgon project and (2) lower
demand for high-priced LNG in Kochi.
Re-gasification tariffs. We model PLNG’s re-gasification tariff to increase by 5% in each
year in FY2012-14E and remain flat thereafter until FY2020E, the terminal year of our
DCF model (see Exhibit 3). We highlight that we assume re-gasification tariffs at
US$0.88/mn BTU from FY2015E until FY2020E. We see significant downside risk to this
assumption.
Exchange rate. We maintain our exchange rate assumptions for FY2012E and FY2013E
at `45.5/US$ and `44/US$.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Petronet LNG (PLNG)
Energy
No gas; only pipelines and terminals. We view the recent shelving of plans to set up
LNG-based power plants as validation of our concerns about acceptance of high-priced
LNG in the crucial power sector. As per recent media reports, (1) NTPC has abandoned
its expansion plans for its Kayamkulam plant and (2) Karnataka state government is not
comfortable about signing a GSPA with GAIL for the Bidadi power plant given the high
price of LNG. The recent spike in spot LNG prices and India’s inability to tie up longterm
LNG has compounded the problems. We retain our SELL rating on Petronet LNG
with a target price of `100.
Power plants baulk at the prospect of high-priced imported LNG
As per Petrowatch, (1) NTPC has abandoned its expansion plans for its Kayamkulam plant given its
inability to sign power purchase agreements (PPAs) with state governments of Tamil Nadu, Andhra
Pradesh, Kerala and Karnataka. NTPC had signed a gas supply agreement with GAIL for 1.2 mtpa
of LNG from PLNG’s Kochi terminal with a linkage of 14.5% to JCC. This would have resulted in
cost of power of Rs6.5/Kwh. (2) The Karnataka government has expressed its discomfort with the
high price of imported LNG for its Bidadi power plant. We view these developments as validation
of our long-standing view that power sector is highly sensitive to the price of imported LNG (see
our note ‘Concerns on high-priced imported LNG emerge’ released on February 21, 2011).
Imported LNG at US$13-14/ mn BTU (delivered) translates into power cost of ~`5/Kwh
Exhibit 1 gives a comparative analysis of cost of power based on different fuels (coal, domestic
natural gas, imported LNG and naphtha). We compute cost of power at ~`5/Kwh assuming
current LNG prices (delivered) of US$13-14/mn BTU. This is significantly higher versus other fuels
like imported coal and domestic gas and is closer to the price of naphtha. The recent
abandonment of plans by NTPC and concerns of the Karnataka government regarding the Bidadi
project reflect users’ concerns about the high cost of power based on imported LNG.
Troubles in Japan + no long-term contracts = spot of bother for India
We highlight that India has signed long-term contracts for LNG for (1) 7.5 mtpa with RasGas and
(2) 1.25 mtpa with XOM from Gorgon compared to its end-CY2012 LNG capacity of 24 mtpa. This
would make India dependent on spot LNG for a significant chunk of its LNG capacity, which would
make it vulnerable to unforeseen events. The recent events in Japan will compound the problems
for India in two ways—(1) ability to source LNG cargoes given likely spurt in demand from Japan
(see our March 22, 2012 comment titled Running of low gas and (2) high price of imported LNG,
which will impact its acceptability in India.
Higher risks to PLNG’s earnings
We maintain our SELL rating on the stock with a 12-month DCF-based target price of `100
noting (1) the stock offers 17% downside from current levels and (2) potential downside risk
to earnings from an unfavorable macro-environment. We model PLNG’s re-gasification tariff
to increase by 5% in each year in FY2012-14E and remain flat thereafter.
A proposal to pool prices may result in lower ‘pooled’ prices for end-consumers and increase
LNG’s acceptance by pooling expensive LNG with cheaper domestic gas. However, we view
the proposal as retrograde in that it subsidizes expensive imported LNG with cheaper
domestic gas. This may affect the chances of further price increases for domestic gas, which
is unlikely to find favor with the domestic gas producers. More important, we see no reason
for domestic producers of gas to be penalized for the incompetence of companies that have
failed to secure long-term contracts of LNG at reasonable prices.
Also, India’s failures to convert potential opportunities have resulted in sudden (actually, not
so sudden) supply problems. As example of India’s failures, we highlight (1) an inability to
secure LNG for NTPC’s power plants from Petronas given RIL’s superior bid in an
international competitive bidding; Petronas’ bid at $3.5/mn BTU in 2003 was higher than
RIL’s bid of US$2.34/mn BTU, (2) inability to source gas from Iran despite negotiations from
the mid-1990s and (3) inability to secure supply from Myanmar despite owning stakes in
two gas blocks in Myanmar; the same gas is being exported to China.
We discuss the key assumptions behind our earnings model below. We note that we may
be been generous with our assumptions of (1) volumes and (2) re-gasification tariffs (see
Exhibit 2).
Volumes. We model contract LNG volumes at 7.5 mn tons, 7.5 mn tons and 8.4 mn tons
in FY2011E, FY2012E and FY2013E. We model spot LNG imports of 1 mn tons in
FY2011E, 2.5 mn tons in FY2012E and 2.5 mn tons in FY2013E.
We assume Kochi project to be commissioned by FY2013E. We highlight that the Kochi
terminal will have to rely on spot LNG cargos until it starts receiving contracted LNG from
the Gorgon project (likely to be commissioned in CY2015/16E). We see downside risks to
our volume assumptions for Kochi terminal from (1) delay in Gorgon project and (2) lower
demand for high-priced LNG in Kochi.
Re-gasification tariffs. We model PLNG’s re-gasification tariff to increase by 5% in each
year in FY2012-14E and remain flat thereafter until FY2020E, the terminal year of our
DCF model (see Exhibit 3). We highlight that we assume re-gasification tariffs at
US$0.88/mn BTU from FY2015E until FY2020E. We see significant downside risk to this
assumption.
Exchange rate. We maintain our exchange rate assumptions for FY2012E and FY2013E
at `45.5/US$ and `44/US$.
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