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Indian users back in market after spot LNG falls from peak

JKM spot LNG prices have plunged from US$32.5/mmbtu on 12-Jan’21 due to milder weather, end of panic buying by Northeast Asian users and more suppliers offering spot cargoes; global LNG liquefaction utilisation remains at just over 70%. Price for prompt LNG delivery in Feb-Mar’21 is down from peak of US$39.3- 13.7/mmbtu to US$8.0-6.9/mmbtu. The spot LNG and oil price surge has improved GAIL’s FY21E and FY22E gas marketing EBITDA outlook. We reiterate HOLD on GAIL. Press reports suggest that Indian users, who stopped buying spot LNG from late-Dec’20 given the price surge, have, after the price plunge, sought cargoes for Feb-Mar’21 delivery. Recent spot LNG fall may mean GGL’s Q4FY21E margin may not be as badly hit as earlier expected. Reiterate BUY on GGL.

* Indian consumers buy spot LNG after sharp fall from record highs: Japan Korea Marker (JKM) spot LNG prices, which had surged ~18x from May’20 lows to an all-time high of US$32.5/mmbtu on 12-Jan’21, are down sharply due to milder weather, end of panic buying by Northeast Asian users and more suppliers offering spot cargoes. Price of cargo for prompt delivery on 11-15 Feb’21 touched a peak of US$39.3/mmbtu on 12-Jan’21, but a tender on 21-Jan’21 received much lower bids of US$9.58-8.0/mmbtu for delivery during 21-26 Feb’21. Spot LNG futures for Mar’21 delivery touched a peak of US$13.7/mmbtu on 13-Jan’21 while tender closing on 26-Jan’21 received bids of US$7.34-6.86/mmbtu for delivery on 11-19 Mar’21 and 24-25 Mar’21 respectively. Press reports suggest that Indian users, who stopped buying spot LNG from late-Dec’20 given the price surge, have now issued at least eight tenders seeking spot supplies for Feb-Mar’21 delivery; at least four of these have been awarded. Spot LNG futures are down to US$8.365-6.1/mmbtu (US$13.7-6.8/mmbtu at peak) for Mar-Jun’21 delivery given the seasonal fall in demand in summer and that global liquefaction utilisation is still just over 70%.

* Upside to GAIL’s FY21E-FY22E EPS due to oil & spot LNG surge: The surge in spot LNG and oil prices, has dramatically improved GAIL’s gas marketing outlook vs Rs8.9bn loss incurred in H1FY21. Upside to GAIL’s FY21E EPS would be 4-31% if sale of 2.5mmt of LNG in Q4 was locked in when spot LNG futures were at US$11-19.1/mmbtu (See Table 5) vs US$10/mmbtu assumed in the base case; its gas marketing EBITDA would be Rs14.6bn-32.6bn in H2FY21E, Rs11.5bn-29.5bn in Q4 and Rs5.7bn-23.7bn in FY21E vs just Rs3bn factored in our FY21E EPS. The surge in FY22E Brent futures to US$56.8/bbl (spot at US$58.6/bbl) may mean GAIL’s gas marketing EBITDA would be Rs23.3bn vs Rs19.2bn in our estimates, implying 5% upside to FY22E EPS.

* Spot LNG fall may mean GGL’s Q4 margin may not be as badly hit as earlier thought: Indian users did not buy spot LNG after it surged in late-Dec’20, but are now buying after its steep fall. This suggests GGL’s Q4FY21E margin may not be as badly hit as one thought earlier. GSPL’s transmission volumes, which were down by ~15% due to surge in spot LNG prices, should also recover given steep fall in spot LNG prices and likely rise in KG-D6 gas output, 80% of which GSPL may transport.

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