Petronet LNG -Gains from Japan quake are a mirage : Macquarie Research

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Petronet LNG
Gains from Japan quake are a mirage
Event
 Petronet LNG (PLNG) could see only marginal, very short- term inventory gains
from the possible tightening of the LNG market due to the Japanese quake. We
believe that any near-term rally in the stock due to investors reacting positively
to the perceived impact from the same is an exit opportunity. We reiterate our
Underperform recommendation, with a TP of Rs 101.

Impact
 LNG markets could tighten: The shutdown of nuclear facilities has removed
10.9 GW of generating capacity from the grid, about 23% of Japan’s total
nuclear capacity and 4% of its total electrical generating capacity. We expect
that LNG and oil products will need to fill the void, which would equate to ~.5
bcfde (240 kboe/d) of incremental demand, or the equivalent of 11 mmtpa of
LNG (~ 5% of worldwide demand).
 Gains for producers and liquefiers, not importers or regassifiers: The big
LNG producers (liquefaction of gas for exports) are only in the Middle East
(Qatar) followed by Australia, none in Asia (see Fig 1). There are LNG regasification
companies in the importing countries Japan (56% of Asia's LNG
imports), Korea (26%) and India (8%). They generally do not benefit as they
are pass through utilities such as Kogas in Korea and Petronet LNG.
 Spot margins at risk: With 8.6 MMTPA of long-term contracts (1.1 MMTPA
signed last quarter), currently PLNG' spot volumes are <25% of effective
capacity; which limits their margins as high-margin spot volumes are reduced.
Further, PLNG’s high spot margins in recent past were attributed by the
management to cheap buys of 2-3 spot cargos, which is not expected to
repeat; especially given the possible tightening of the market post the quake.
 Utilization has reached 85-90%: We believe the Dahej terminal of PLNG is
currently functioning at utilization of more than 85% of its effective capacity of
11.5 MMTPA. This high utilization level leaves very little upside in terms of
volumes (whether spot or long-term LNG), hence PLNG cannot be expected
to gain much from the upcoming expansion of the Dahej-Vijaipur-Dadri
pipeline (partially complete, 11 mmscmd augmentation done in 3Q FY11)
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs101.00 based on a DCF methodology.
 Catalyst: Rampup of KGD6 gas volumes could push out pricier LNG
Action and recommendation
 Risky, short-term gains; expensive stock – Switch to GAIL : The stock is
trading at an expensive 2.7x FY12E P/BV, and has no near-term triggers
which could propel earnings. We recommend a switch to our sector top pick
GAIL, which has assured volume growth (whether indigenous or LNG is
immaterial), pass-through pricing, upcoming doubling in capacity of high-profit
petrochemicals business, and cheaper valuations of 2.5x FY12E P/BV.