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European winter severity to determine gas/LNG price outlook

Dutch TTF and UK NBP gas prices are up 22% in the last three days to US$24.5- 24.6/mmbtu. This surge was triggered by German energy regulator saying it has four months to certify Nord Stream 2 gas pipeline and fire at a conveyer station in UK that shut cable transmitting 1 GW power from France to UK. JKM spot LNG futures for Nov’21-Feb’22 spiked to US$25.7-26.8/mmbtu as Asia and Europe compete for gas supplies.

European gas storage being at least at 11-year seasonal low is one of the main drivers of global gas and LNG rally and is also key to outlook. If EU gas storage fall is similar to FY21, FY17 and FY18, gas/LNG prices may rise further/remain high but if fall is similar to FY19-FY20, prices may correct. Either way, outlook for ONGC, OIL and GAIL is good and for GGL poor.

* European winter key to European gas & JKM spot LNG outlook: On 13-Sep’21, EU gas storage was at least at 11-year low of 70.9% full vs 77.1-94.2% full in the preceding five years. In last five years, EU gas storage fell by 44-70.9 pct points from peak before winter to nadir of 18-54% full in Mar. EU storage at nadir in Mar’22 would be lowest ever at 7.4-10.7% full if winter storage fall is similar to FY17, FY18 and FY21 but more comfortable at 30.5-33.8% full if fall is similar to FY19-FY20.

* 12-41% upside to ONGC & OIL’s FY22E-FY23E EPS: Factoring Brent and LPG (US$675/t) based on latest futures, NRL’s FY22E GRM at US$37/bbl (vs US$32/bbl in base case) but lower than estimated gas sales volumes for ONGC, we estimate upside to FY22E EPS of ONGC at 12% and to that of OIL at 17%. Upside to FY23E EPS of OIL and ONGC is estimated at 27-41% at Brent, deepwater and APM gas prices based on latest futures, but lower gas volumes for ONGC.

* 34-8% upside to GAIL’s FY22E-FY23E EPS: Henry hub (HH) gas prices have surged to over 9-year highs but Brent is rangebound below 5-Jul’21 peak. At latest HH and Brent futures, GAIL’s FY22E-FY23E gas marketing EBITDA at Rs13-27bn is 52-30% below our estimates. However, GAIL has indicated it had tied up all its LNG to be sold in FY22-FY23E at oil-linked prices by mid-Aug’21 and 20% of volumes will be sold at spot prices. Thus, at latest futures, profit on selling HH linked US LNG at spot prices is estimated at US$10.2-4.4/mmbtu and at oil-linked prices at US$0.02-0.8/mmbtu in FY22E-FY23E. It would imply GAIL’s FY22E-FY23E gas marketing EBITDA at Rs60-51bn may be 117-30% and FY22E-FY23E EPS 34-8% higher than our estimates (includes 9% gain from higher LPG). Large EPS upside appears imminent even if JKM LNG corrects

* Big downside to GGL’s FY22E EPS; 62-66% CNG price hikes needed: We believe GGL’s Rs4.44/scm (14%) gas price hike for industrial consumers on 24- Aug’21 is inadequate given spot LNG price and futures surge. We estimate EBITDA margin of Rs0.7/scm in Q2 and minus Rs1.8/scm in FY22E if no further price hike. Further 59-68% price hike is needed on 1-Dec’21 for FY22E EBITDA margin to be Rs4.5-5.5/scm. Downside to FY22E EPS would be 154-21% if margin is at minus Rs1.8/scm to Rs4.5/scm. Spot LNG fall if winter is mild may give some relief but downside to EPS is imminent. To pass on APM gas price rise from US$2/mmbtu in H1FY22 to US$3.15/mmbtu in H2 and at latest futures, to US$6.7-9.1/mmbtu in H1- H2FY23E, GGL, MGL and IGL need to hike CNG prices by 62-66% in Oct’21- Oct’22. This may be challenging especially if it is accompanied by sharp rise in commission to OMCs and progress on allowing genuine competition to incumbents.

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