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Petronet LNG
‘Cagey’- D6 vs LNG cost pressures
Event
Petronet announced Q4FY11 PAT of Rs2.06 bn, growth of 112% YoY and
21% QoQ on the back of highest-ever volumes of 125.75 Tbtus. FY11E PAT
was 4% above expectations due to higher spot cargos in the latter half of the
year. Going forward, we expect spot margin compression to offset some of
the positives for Petronet coming from high volumes due to KG D6 production
decline. We increase TP to Rs 111 (from Rs 101) and maintain Underperform.
Impact
10% YoY volume growth in FY11; but utilizations are peaking: Petronet is
exposed to spot LNG to the extent of 25% of its maximum capacity of 11.5
MMTPA (10.5 MMT operational), as it has a 7.5MMTPA long-term and 1.1
MMTPA short-term contract (FY12-13) with RasGas. For Q4FY11, utilizations
reached 94% of operational capacity, from ~67% in Q1FY11, capping further
upside till a new jetty is built, enabling a further scale up.
Japan pulling up LNG prices: Japan is battling power woes in the aftermath
of the earthquake that shutdown many nuclear facilities, removing 10.9 GW of
generating capacity (~23% of Japan’s nuclear capacity and 4% of its total
electrical generating capacity, or equivalent of 11 MMTPA of LNG, ~5% of
worldwide demand). Qatar, the world’s top LNG exporter, recently announced
that it would divert 4 mmt (or ~60 cargos) of LNG from Europe to Japan. This
has boosted spot LNG prices by 20-25%, signalling a potential increase in
spot LNG tanker rates in the short term and a push to long-term LNG prices.
Filling in for KGD6 decline could be offset by spot margin compression:
The decline in gas production from the KG D6 block, and RIL’s inability to
provide any further clarity on either quantum or timelines for ramp-up of
volumes have helped Petronet’s offtake, as well as boosted expectations of
near-term demand for the relatively expensive LNG, as it still is cheaper than
liquid fuels like naphtha/ fuel oil. However, with spot LNG prices having
increased post the Japanese crises due to a demand pull resulting from shut
nuclear plants/refineries, we expect cost pressures on Petronet’s margins.
Earnings and target price revision
FY12-13E PAT increased by ~8% based on increase in volume expectations
by 4-6 mmscmd to fill in for KG D6 decline; partially offset by compression in
spot margins. TP increased to Rs 111 ( from Rs101)
Price catalyst
12-month price target: Rs111.00 based on a DCF methodology.
Catalyst: Clarity on ramp-up of KGD6; Increase in DVPL pipeline capacity
Action and recommendation
The stock has run up 24% in the past 2 months due to negative newsflows on
KGD6, and is trading at extremely expensive valuations of 3.1x FY12E P/BV.
We believe that GAIL presents a much better risk-reward than Petronet as a
utility business with lower valuations of 2.6x P/BV and recommend a switch.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Petronet LNG
‘Cagey’- D6 vs LNG cost pressures
Event
Petronet announced Q4FY11 PAT of Rs2.06 bn, growth of 112% YoY and
21% QoQ on the back of highest-ever volumes of 125.75 Tbtus. FY11E PAT
was 4% above expectations due to higher spot cargos in the latter half of the
year. Going forward, we expect spot margin compression to offset some of
the positives for Petronet coming from high volumes due to KG D6 production
decline. We increase TP to Rs 111 (from Rs 101) and maintain Underperform.
Impact
10% YoY volume growth in FY11; but utilizations are peaking: Petronet is
exposed to spot LNG to the extent of 25% of its maximum capacity of 11.5
MMTPA (10.5 MMT operational), as it has a 7.5MMTPA long-term and 1.1
MMTPA short-term contract (FY12-13) with RasGas. For Q4FY11, utilizations
reached 94% of operational capacity, from ~67% in Q1FY11, capping further
upside till a new jetty is built, enabling a further scale up.
Japan pulling up LNG prices: Japan is battling power woes in the aftermath
of the earthquake that shutdown many nuclear facilities, removing 10.9 GW of
generating capacity (~23% of Japan’s nuclear capacity and 4% of its total
electrical generating capacity, or equivalent of 11 MMTPA of LNG, ~5% of
worldwide demand). Qatar, the world’s top LNG exporter, recently announced
that it would divert 4 mmt (or ~60 cargos) of LNG from Europe to Japan. This
has boosted spot LNG prices by 20-25%, signalling a potential increase in
spot LNG tanker rates in the short term and a push to long-term LNG prices.
Filling in for KGD6 decline could be offset by spot margin compression:
The decline in gas production from the KG D6 block, and RIL’s inability to
provide any further clarity on either quantum or timelines for ramp-up of
volumes have helped Petronet’s offtake, as well as boosted expectations of
near-term demand for the relatively expensive LNG, as it still is cheaper than
liquid fuels like naphtha/ fuel oil. However, with spot LNG prices having
increased post the Japanese crises due to a demand pull resulting from shut
nuclear plants/refineries, we expect cost pressures on Petronet’s margins.
Earnings and target price revision
FY12-13E PAT increased by ~8% based on increase in volume expectations
by 4-6 mmscmd to fill in for KG D6 decline; partially offset by compression in
spot margins. TP increased to Rs 111 ( from Rs101)
Price catalyst
12-month price target: Rs111.00 based on a DCF methodology.
Catalyst: Clarity on ramp-up of KGD6; Increase in DVPL pipeline capacity
Action and recommendation
The stock has run up 24% in the past 2 months due to negative newsflows on
KGD6, and is trading at extremely expensive valuations of 3.1x FY12E P/BV.
We believe that GAIL presents a much better risk-reward than Petronet as a
utility business with lower valuations of 2.6x P/BV and recommend a switch.
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