Sell Petronet LNG
Published on Wednesday, August 12th, 2009 at 12:47 PMAuthor: insight95in (92 Articles)
Petronet LNG
Sell
Price: Rs 66 Traget Price: (Mar 10): Rs56
Exxon contract in the price
Petronet has finally closed its long pending contract with Exxon Mobil for supply of 1.5 mmtpa LNG from the Gorgon LNG project in Australia. However, there is no clarity regarding the pricing of the gas, which is critical in terms of assessing the long-term viability of this contract. We believe that the upside from this contract is already in the price, and reiterate Sell on the stock.
Firm GSPA for 20 years
The Exxon contract starts from 2014 (20 years duration), and would be a binding agreement for both the sides. Petronet has de-risked this contract by signing a back to back sales agreement with its three promoters; BPCL, IOC and GAIL; in the ratio of 40:30:30 respectively. The agreement is on similar lines to that for its Dahej terminal (with Ras Gas), but the pricing for this contract is not disclosed by the management. We believe price to be a major risk, considering this gas would be directly competing with low cost domestic gas. However, we have already built in volumes from Kochi for our valuations, and hence do not see any upside to our fair value from this contract.
…but spot cargoes to reduce
We expect spot volumes for Petronet to reduce on the back of increased gas availability from indigenous source (East Coast – RIL KG Gas). Further, the Ratnagiri LNG project will also be commissioned in by the end of the current year further improving availability of gas. However, we expect that long-term contracts for Dahej would still continue to be in demand as pricing is comparable to other spot and term contracts.
…and spare capacity at Dahej to remain
Petronet’s 2.5 mmtpa (25%) of expanded Dahej capacity is not yet contracted. This capacity could be used for spot LNG cargoes, but given that we believe spot volumes to reduce, the un-contracted capacity is likely to be idle. Hence, we believe that entering into a term contract to utilize this spare capacity would improve valuations. The recent correction in LNG prices offers good opportunity for Petronet to enter into a contract and utilize the spare capacity. However, until then, the stock does not offer any trigger going forward, and hence we maintain Sell.
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