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Energy
India
Gone with the gas. We see gas supply issues derailing the India gas story and raising
concerns about the viability of new gas-based power plants, pipelines and LNG import
terminals. Domestic gas supply problems and a limited ability to sell high-priced LNG in
the domestic market may result in severe under-utilization of planned capacities.
We rate all gas stocks under our coverage as REDUCE or SELL. ‘Pooling’ of gas may help
but seems to be a highly retrograde step, in our view.
Demand exists but at the right price
We do not doubt potential demand for natural gas in India but believe that it will be sensitive to
the price of gas. Current regulations preclude the use of high-priced gas in regulated sectors such
as fertilizer and power, the key users of gas in India. It may be cheaper to import urea or generate
power on imported coal, in our view. We see the proposed pooling of gas prices as a retrograde
step in that it penalizes efficient domestic producers and covers up the poor planning of other
companies.
Supply may disappoint due to poor planning and unforeseen incidents
(1) Spot LNG is not a viable option for the Indian market, particularly for bulk users, given the likely
uncompetitive price of end-products, urea and power. Also, fertilizer and power plants are unlikely
to commit capital or see financial closure without a firm fuel supply agreement. (2) Domestic
supply may disappoint given continued delay in E&P activity in NELP blocks; also, RIL may not be
able to ramp up gas production from KG D-6 block as per our expectations.
Limited amount of gas but large amount of infrastructure planned
We project gas supply to increase to 264 mcm/d in FY2015E from 179 mcm/d in FY2011E.
However, this is subject to (1) RIL producing 80 mcm/d of gas from its KG D-6 block and
(2) availability of sufficient spot LNG in global markets. We expect significant under-utilization of
downstream assets (pipelines, LNG import terminals) with corresponding impact on companies’
earnings.
Retain REDUCE/SELL rating on gas plays
We see significant downside risks to the earnings of GAIL, GSPL and PLNG from lower-thanexpected
supply of domestic gas and imported LNG. In the case of GSPL and PLNG, we see risks
from lower-than-expected tariffs (pipeline or re-gasification) also. Finally, in the case of RIL, we see
downside risks to earnings and valuation of KG D-6 block and other prospective blocks if
production figures disappoint versus our expectations and that of the Street.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Energy
India
Gone with the gas. We see gas supply issues derailing the India gas story and raising
concerns about the viability of new gas-based power plants, pipelines and LNG import
terminals. Domestic gas supply problems and a limited ability to sell high-priced LNG in
the domestic market may result in severe under-utilization of planned capacities.
We rate all gas stocks under our coverage as REDUCE or SELL. ‘Pooling’ of gas may help
but seems to be a highly retrograde step, in our view.
Demand exists but at the right price
We do not doubt potential demand for natural gas in India but believe that it will be sensitive to
the price of gas. Current regulations preclude the use of high-priced gas in regulated sectors such
as fertilizer and power, the key users of gas in India. It may be cheaper to import urea or generate
power on imported coal, in our view. We see the proposed pooling of gas prices as a retrograde
step in that it penalizes efficient domestic producers and covers up the poor planning of other
companies.
Supply may disappoint due to poor planning and unforeseen incidents
(1) Spot LNG is not a viable option for the Indian market, particularly for bulk users, given the likely
uncompetitive price of end-products, urea and power. Also, fertilizer and power plants are unlikely
to commit capital or see financial closure without a firm fuel supply agreement. (2) Domestic
supply may disappoint given continued delay in E&P activity in NELP blocks; also, RIL may not be
able to ramp up gas production from KG D-6 block as per our expectations.
Limited amount of gas but large amount of infrastructure planned
We project gas supply to increase to 264 mcm/d in FY2015E from 179 mcm/d in FY2011E.
However, this is subject to (1) RIL producing 80 mcm/d of gas from its KG D-6 block and
(2) availability of sufficient spot LNG in global markets. We expect significant under-utilization of
downstream assets (pipelines, LNG import terminals) with corresponding impact on companies’
earnings.
Retain REDUCE/SELL rating on gas plays
We see significant downside risks to the earnings of GAIL, GSPL and PLNG from lower-thanexpected
supply of domestic gas and imported LNG. In the case of GSPL and PLNG, we see risks
from lower-than-expected tariffs (pipeline or re-gasification) also. Finally, in the case of RIL, we see
downside risks to earnings and valuation of KG D-6 block and other prospective blocks if
production figures disappoint versus our expectations and that of the Street.
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