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Spot LNG rebounds as Asia & Europe compete for supplies

JKM spot LNG prices, which fell from record highs in Jan’21 to US$5.6/mmbtu in Mar’21, have rebounded to US$8.85/mmbtu. This rebound has been driven by: 1) strong demand from China, Japan and Korea as they seek to replenish inventory that fell during the extreme winter in Q1CY21; 2) European gas inventories at 3- year low; 3) outages at LNG export plants in Russia and Australia. GAIL is best placed to gain from the oil and spot LNG surge, which augurs well for its FY22E gas marketing EBITDA outlook.

Higher underlying prices mean APM gas price may be higher in H2FY22-FY23E and upside of 1-7% to OIL’s FY22-FY23E EPS. Gujarat Gas’ (GGL) margins are likely to dip in Q4FY21E, but a smart rebound is likely in margins on QoQ lower spot LNG. Reiterate BUY on GAIL, OIL and GGL

* JKM spot LNG up 58% from Mar’21 low: Japan Korea Marker (JKM) spot LNG price, which had plunged from an all-time high of US$32.5/mmbtu in Jan’21 to US$5.6/mmbtu in early-Mar’21, has now rebounded by 58% to US$8.85/mmbtu; this is the highest spot LNG price for this time of the year since 2014 (7-year high). Extreme winter that led to depletion of gas inventories in North Asia and Europe is at the root of the current spot LNG rebound. Asian LNG demand was boosted by restocking for next winter in China, Korea and Japan. Tripping of a nuclear reactor in South Korea in late-Mar’21 and early-Apr’21 and maintenance shutdown of another reactor from 20-Apr’21 also boosted LNG demand. Nuclear availability in Korea is likely to be down 5-15% YoY in Apr-Jun’21, which may support spot LNG demand.

European gas storage, which was 96-74% full on 11-Oct’20 and 1-Jan’21, is now at a 3-year low for this time of the year of 30% full. Gas storage declined due to: 1) diversion of large LNG volumes to Asia in Q1CY21 given high JKM prices; 2) high gas withdrawals due to very cold winter in Europe; 3) record high demand in Apr’21 (up 43% YoY and 16% over Apr’19 level) due to unseasonably cold temperatures and relatively low pipeline supply from Russia and Norway. Competing with each other for supply has led to surge in both European gas and Asian spot LNG prices.

* Oil & spot LNG surge may mean upside to GAIL’s gas marketing EBITDA: Brent is at US$65/bbl in FY22-TD and futures for rest of FY22 are at US$67/bbl. Spot LNG price is at US$7.7/mmbtu in FY22-TD and futures for rest of FY22 are US$10/mmbtu. We estimate GAIL’s FY22E gas marketing EBITDA at Rs27.6bn assuming Brent at US$60/bbl, but surge in spot LNG and oil may mean significant upside to it. At latest Brent and spot LNG futures, FY22E gas marketing EBITDA is estimated at Rs46bn; actual EBITDA would depend on futures prevailing when volumes were locked-in. Outlook is also good for GAIL’s FY22E petrochemical EBITDA, which we estimate to be up 17% YoY but upside to which appears likely; if it is at annualised Q3FY21-Q1FY22E EBITDA level, it would mean upside to our estimate of 35-108%. Upside to GAIL’s FY22E EPS may be 22-32%.

* GGL’s margin to rebound in Q1FY22E on QoQ spot LNG fall & realisation rise: We estimate GGL’s Q4FY21E EBITDA margin at Rs4.5/scm hit by surge in spot LNG price (assumed at US$10.5/mmbtu). Margin is likely to surge to Rs7.1/mmbtu in Q1FY22E given 19% QoQ fall in spot LNG and 5% QoQ rise in realisation.

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