Petronet LNG: Buy  

After being in hibernation for the last couple of months when it remained range-bound in the Rs 45-50 band, the Petronet LNG stock turned active on Thursday hitting the upper circuit filter at Rs 58. While the stock appears fully priced after the surge, long-term investors can still take positions at the current price.

The capacity expansion at Dahej and the prospect of an important deal for LNG supply being tied up soon offer confidence in the long-term even as near-term earnings get a boost from the company's strategy of contracting spot LNG cargoes for ready buyers.

An acceptance by Qatar of the government's offer to pick-up equity in the company will be a big positive as the former will turn into a stakeholder in Petronet from the position of just being a supplier of LNG. Given India's growing appetite for energy, especially natural gas, Qatar's interest in Petronet may ensure adequate LNG supply on favourable terms.

Sole LNG play

Petronet LNG, promoted by IOC, ONGC, BPCL and GAIL, has a 25-year agreement for import of 7.5 million tonnes of LNG from Ras Gas of Qatar.

The Dahej import and re-gasification terminal takes up five million tonnes of this now; supplies of the balance will commence in 2009 when the capacity at Dahej is doubled.

Petronet is also in the process of beginning work on a second import terminal at Kochi, which is likely to go onstream by 2011 taking the company's total re-gasification capacity to 15 million tonnes per annum.

The demand for natural gas is projected to shoot up to 300 million standard cubic metres per day by 2011 with supply lagging, leaving enough scope for Petronet's business.

The key, of course, will be availability of adequate quantum of LNG on long-term contract. Petronet is in talks with the operators of the Northwest Shelf LNG project in Australia for a possible long-term supply for the planned Kochi terminal.

This is in addition to the request for 10 million tonnes placed with Qatar last week. The LNG business has turned into a sellers' market now and there is big demand for the existing un-contracted supply sources, including in Qatar.

Access to LNG and its pricing will, therefore, constitute the major challenges facing Petronet in the medium-term, which will be covered if Qatar becomes a stakeholder in the company.

Assuming this does not happen, Petronet will be faced with a stiff challenge in arranging long-term supply for its expansion projects at competitive prices.

Along with the prevailing price of liquid fuel alternatives such as naphtha and fuel oil, the economics of the natural gas market will be determined by domestically produced gas, which is expected to enter the market by 2009.

Therefore, it is important for Petronet to get the best possible LNG price from its suppliers for it to be competitive in the domestic market.

Spot support

Given that buoyancy in revenue and earnings can come only from higher volumes, Petronet has actively sought out spot market LNG cargoes. The company has contracted four such cargoes in the first half of this fiscal with an equal number likely in the second.

The company has not faced any difficulty in marketing this gas at almost double the existing price given the comparatively high prevailing prices of liquid fuel alternatives. The advantage of this strategy is that re-gasification charges go straight to the bottomline as there is no extra cost involved. Thanks to this, earnings received a boost in the first quarter.

Spot cargoes will be a critical factor in keeping near-to-medium/term earnings and revenues buoyant till capacity expansion is completed and LNG from long-term contracts starts flowing in.

Investors with a long-term perspective can accumulate the stock at current levels.

Source: Business Line, New Delhi, October 11, 2006
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