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Natural Gas: Win Some Lose Some on Gas Scarcity

  • Emkay Global Financial Services has come out with its report on Natural Gas. Petronet LNG is a preffered pick in this space.Decline in RIL's KG-D6 gas production over the next two years affects Power and Gas transmission companiesOverall natural gas production to decline in 2013 to 179mmscmd, however overall supply to depend on LNG import onlyWe expects GAIL's transmission volume to decline marginally by 1.6% to 116.1mmscmd for FY13E, however volumes would increase by 9% in FY14E to 126mmscmd as LNG volumes at Kochi and Dabhol are ramped up

  • Petronet LNG is our preferred pick in Oil & Gas. It's in a sweet spot as declining domestic supplies and softening global LNG market turn in its favor. Any effort by company to increase /fasten LNG volume ramp at Dahej/Kochi would be positiveRIL's KG D6 gas production to decline to 22mmscmd in 2013-14 Recent media reports suggest that RIL has intimated DGH on lower gas production estimates from KG basin. It estimates production to fall to about 28mmscmd and 22mmscmd for FY13E and FY14E respectively. Current KG basin gas production stands at about 37mmscmd with D1-D3 production at about 30mmscmd and MA field contributing the rest. Based on various media reports, for FY13E, D1-D3 is expected to have production of about 20mmscmd and MA field about 7.5mmcmd. And for FY14E it would be at 14mmscmd and 8.6mmscmd respectively.

  • This is negative for downstream industries like pipeline and CGD companies also user industries like power and fertiliser who use natural gas in the form of fuel or feedstock. In this report we try to look at which companies are likely to be impacted from any decline in RIL's gas production from KG basin. As a fall-out of decline in KG basin gas production, we like Petronet LNG within the oil and gas space as this would lead to higher demand for imported LNG. This coupled with any expected softening in LNG spot market in Asia, the macro is favorably placed in favor of Petronet LNG.

Positives/Negatives of lower gas production from KG D6 on natural gas

  • companies:

  • Petronet LNG: Biggest beneficiary of decline in KG D6 gas output

  • Transmission Companies:

  • GSPL: Impact muted due to take of Pay contract with the customers

  • GAIL: Expect transmission volume to decline in FY13E to 116mmscmd, however increase in volume from Dabhol's RLNG, Kochi Terminal and ONGC's marginal field to increase the transmission in FY14E to 126mmscmd

  • City gas companies:

  • Indraprastha gas : Already replaced KG D6 gas with RLNG from mid December 2011

  • Gujarat Gas : Not yet allocated KG D6 gas hence no impact on the account of lower KG D6 gas output.

  • Overall natural gas production to decline over next two years: Total natural gas production in India is expected to decline over the next two years as gas production declines from KG basin as any increase in production from other sources is expected to be about only about 6-7mmscmd coming from GSPC's Deen Dayal field and ONGC's marginal fields.

  • Petronet LNG: PLNG is in a sweet spot with macro factors turning in its favor. PLNG is expected to perform well going forward on the back of higher volume growth. Although we don't change our volumes for FY12E and FY13E, we expect company to fasten ramp of Kochi LNG terminal to capture gas market from declining domestic production. Our EPS estimate of Rs.14.4 and Rs14.5 for FY12E and FY13E respectively, implies an earning CAGR of 32.4% over FY11-13E. However the recent news on proposed cap on gas marketing margin which is to be decided by PNGRB (if it happens so) would have very muted impact on EPS in our view.

  • GAIL (INDIA): Decline in domestic gas production leading to decline in transmission volumes would weigh on the stock. We factor in 116mmcsmd for FY13E as against 124mmscmd earlier and 118.5mmscmd in FY12E. Also the recent news on proposed cap on gas marketing margin which is to be decided by PNGRB would keep the stock under pressure until any clarity emerges. However we don't see major earnings risk as it charges MoPNG-determined marketing margins on APM and PMT volume which accounts for 80% of the total volume. Based on the cut in earnings on account of decline in transmission volumes we cut out target price to Rs434 from Rs449 earlier. At CMP stock trades at 12.8x FY13E EPS and 2x P/BV, maintain ACCUMULATE on the stock.

  • Gujarat State Petronet: The current transmission tariff and volume growth for FY12E and FY13E is already priced in. Also being a pure transmission company, concerns of marketing margin do not apply to GSPL. Our valuations factor in a lower tariffs (Rs.0.75/scm in long term), based on which we reiterate BUY on GSPL which offers favorable risk-reward at the current levels. At CMP of Rs.75 the stock trades at 7.6x FY13E EPS and 1.4x P/Bv.

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