PLNG – Clarity affords focus
We hosted a two-day roadshow with Petronet LNG (PLNG) to understand the company’s future plans. The lucidity of the Tellurian deal (expression of unattractive investment) and long-term growth concerns (addressed by the Gopalpur and Sri Lanka terminals, and ssLNG) underpin our conviction in the company; we reiterate it as our top pick in the midcap space, with TP of INR336. Here are some key insights:
Tellurian deal – interest in procuring LT gas at spot rates
* The Tellurian deal officially expired on 31st May’20; however, PLNG is still evaluating the deal, more as a commitment toward procuring Long-Term (LT) gas at cheaper spot-linked prices.
* PLNG specified that in the current environment of cheaper global gas prices (owing to the huge supply glut); low priced LNG is also available without making upstream investment.
* PLNG has received positive responses for its LT commitment of gas off-take (~1mmtpa) linked to spot prices; the company’s board is deliberating on this, and a decision is expected within the next five to six months.
* PLNG reiterated that it had never marketed volumes and would not do so in future either; thus, it plans to sign back-to-back contracts only.
Eastern coast (Gopalpur) terminal – already approved by the board
* PLNG is considering to set up an LNG terminal in Gopalpur (Odisha), connected to the Jagdishpur–Haldia–Bokaro–Dhamra Pipeline (JHBDPL ~100km away); this would be the biggest beneficiary of new-age CGD gas demand in eastern India.
* This LNG project would strategically place PLNG (providing access to the western–southern– eastern coasts), aiding the benefit of gas swapping as the CGD network expands in the country. It would further facilitate the supply of gas to participants (consumers) on recently launched gas exchanges by delivering gas in various proximities.
* The feasibility study for the project is complete, and the company is currently in the process of determining whether to set up a land-based terminal or floating (FSRU) terminal; the decision is expected in another three to four months.
* Around 5mmtpa capacity for the land terminal would incur capex of USD700–800m, while FSRU would incur only half the cost (but would have higher opex)
Near-term capex plans – to assure growth
* Dahej – USD350m for tanks and jetty expansion: Two more tanks and a jetty are being developed at Dahej (in addition to the existing six tanks and two jetties); completion is targeted by the end of 2023 / FY24. With the introduction of the third jetty, Dahej is expected to serve as a full-fledged LNG hub on the western coast.
* Eastern coast LNG terminal – USD700–800m: ~100km away from JagdishpurHaldia pipeline.
* Sri Lanka LNG terminal – USD175m (of the total 350m) in the near term: With a change in the political scenario in the country, talks related to the LNG project have gained momentum. Also, the terminal would enjoy proximity to a power plant, aiding gas off-take and supporting utilization rates.
* Small-scale LNG (ssLNG) stations on highways: USD100m (of the total USD500m) in two to three years – PLNG plans to set up ~50 ssLNG stations on five highways over the next two to three years (under Phase I). It has entered into an MoU with GUJGA to set up five stations on the Delhi–Mumbai highway; IGL would also set up three stations on the highway, taking the total count to eight. Another MoU has been signed with IOC for setting up five LNG stations in southern India.
* Until there is further clarity/affirmation on capex plans, the company guides to keep improving the dividend policy and payout (at ~70%).
Dahej terminal – currently operates at ~107% utilization
* LNG imports have clearly led recovery post the easing of the lockdowns in India, with Dahej emerging as the biggest beneficiary.
* Utilization at Dahej, which plunged to ~60% of normal levels in Apr’20, has revived to ~107% currently (at par with its five-year average utilization rate on the expanded capacity; to 17.5mmtpa from 10mmtpa).
* Dahej has 16.6mmtpa of LT sourcing/utilization contracts (7.5 + 8.25 + 0.85 from Gorgon), while the rest is driven by strong Power sector demand. Off-takers have also been blending spot gas with LT contracts to balance prices, further aiding imports.
* Also, as Kochi ramps up, the idea could be to explore cheaper spot gas first; thus, the current Gorgon volumes at Dahej may not go to Kochi immediately.
* Dahej terminal’s tariff still has huge scope for escalation as it stands lower (~INR10/mmbtu) than the next minimum gas tariff in the country.
* Status of force majeure invoked during the COVID-19 lockdown:
* One cargo has already been moved out of the Gorgon volume.
* While discussions are still ongoing for seven cargoes at Dahej, the company believes they should swing in favor of PLNG.
Kochi terminal: some delay in ramp-up owing to pipeline
* PLNG expects capacity utilization at Kochi to reach ~40% in the near term (we build it for FY22) as the Kochi–Mangalore pipeline is completed.
* Industrial demand in Mangalore is around 0.8–1.2mmtpa, while further growth could come from the proliferation of CGDs. PLNG expects overall demand from the CGD sector in the country to double after the gestation period of the 9–10th CGD round is over.
* Kochi’s tariff in FY20 was revised down to INR79.14/mmbtu; for FY21, a 5% tariff increase has already been charged to off-takers (calculation based on long-term IRR up to 2035 for 1.44mmtpa of Gorgon volume).
Valuation and view – top pick in the midcap space
* The current low spot price environment bodes well for the government’s plan to bring about major reforms in the Gas sector, including the revival of gas-based power plants.
* PLNG’s three concerns – (a) competition, (b) usage of cash, and (c) long-term growth – have been well-answered by management (as highlighted above). Also, the National Green Tribunal (NGT)’s actions against severely/critically polluted industrial clusters could provide a huge boost to gas consumption in the country.
* The company had declared final dividend of INR7/share in FY20. We expect the dividend payout (~70%) to remain strong, presenting an attractive dividend yield of 4–5% over FY21–22E (with ROE of 25–26%).
* With the concerns related to Tellurian resolved and answers provided on longterm growth, the stock trades at a very appealing valuation of 12.4x FY22E EPS of INR21.3 and 7.1x FY22E EV/EBITDA, with an EBITDA CAGR of ~15% expected over FY20–22E. We value PLNG on DCF to arrive at a fair value of INR336. Reiterate Buy.
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