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LNG demand hit seen in some sectors but overall industry still resistant

* Our channel checks in the gas industry suggest that the spike in spot LNG prices has hit demand from sectors like power and SMEs (e.g. ceramics serviced by CGD players). However, certain segments, such as fertilizer, refineries, petchem and large industries (like steel), have maintained their R-LNG intake.

* India’s LNG imports rose 15% MoM to 89.5mmscmd in Feb’22 as delivered spot LNG prices cooled off to below USD30/mmbtu. Mar’22 average deliveries are also expected at the similar range. However, due to the Russia-Ukraine war, Apr’22 deliveries would again rise to ~USD35/mmbtu.

* Due to the trailing crude average formula, term LNG prices are attractive at USD11- 12/mmbtu now. Even at USD120/bbl Brent, a ~USD16/mmbtu implied price is seen as reasonable by customers and demand is likely to be stable. GAIL’s US LNG delivered at USD10-11/mmbtu price (at current Henry Hub) is the most economical in India now.

* LNG demand from the power sector is down significantly as high spot prices make it completely suboptimal. The Morbi ceramic sector’s volumes have also come down to 4.5mmscmd as Gujarat Gas reapplied differential pricing, where any volume above the hurdle rate is sold at Rs112/scm (spot LNG rate) vs. Rs58/scm for others (OSP).

* Apr’22 propane is expected to be at Rs70-80/scm, pricier than OSP but cheaper than the spot rate. Gujarat Gas may raise prices further in Apr’22 as economics become favorable; this would also help in raising the hurdle rate, with any cooling off in spot LNG prices further beneficial to margins. Q4 total volume is restricted at ~10mmscmd.

* Fertilizer sector offtake is healthy as many plants came back from Jan’22 maintenance and as the subsidy is taking care of the input cost rise. Sectors like steel are doing well, and hence are able to absorb higher spot LNG prices. Refineries, mostly PSUs, consume term LNG, and hence are maintaining RLNG offtake, as per our checks.

* As per Jan’22 utilization data by PPAC, Petronet LNG’s Dahej utilization was ~80%, while Kochi was at ~15%. Feb’22 and Mar’22 have seen a slight improvement and we expect terminal utilization for Q4FY22 to be at ~85%/20%. As per checks, spot LNG offtake in the Dahej terminal under the tolling arrangement by parties such as GSPC, IOCL and BPCL has declined, though term LNG contracts are currently running at full capacity, thereby protecting further downsides.

* Globally term LNG deals are still happening at favorable Brent slopes of 10-13%, despite the Russian issues, though large sellers like Qatar are seeking larger volumes. Indian offtakers are also actively looking to enter into long-term contracts, though they may have to jointly look for such contracts through PLNG.

* GSPL’s volumes in Q4 have ranged around 30-31mmscmd, though use-or-pay would protect revenues. RIL’s MJ1 bidding is expected soon, and sizeable volumes should come to GSPL as in past rounds, hence GSPL’s LNG dependence would somewhat fall. New sources like Vedanta are also adding up. The Mehsana-Bhatinda pipeline is expected to be commercialized in Q1FY23.

* We have a Buy rating on GAIL (TP Rs210), GSPL (TP Rs430) and PLNG (TP Rs270). While the gas pricing outlook seems volatile, valuations of GSPL and PLNG are still attractive. GAIL’s marketing segment is well placed under the current scenario.

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