Petronet LNG: lower volume, but worst could be behind it
When spot prices are lower than that of contracted long-term prices, it is natural for consumers to be reluctant to make long-term purchases. That’s what happened with Petronet LNG Ltd. Moreover, the anticipated revision of the RasGas, Qatar, contract led to further reduced offtake.
For the December quarter, long-term volume was about 38 trillion British thermal units (trillion Btus), representing just two-fifths of the contracted volume. As a result of lower long-term volume, the firm had to bear ship idling charges worth about Rs.85 crore in the quarter.
Sure, short-term volume and volume from services (tolling) increased, and compensated for the lack of long-term volume. Still, capacity utilization fell. Petronet LNG’s Dahej Terminal has operated at around 109% of its nameplate capacity for the December quarter against 120% for the September quarter. The volume regasified at Dahej Terminal last quarter was 138 trillion Btus compared with 154 trillion Btus for the September quarter. The Kochi Terminal handled only a nominal volume of liquefied natural gas (LNG), according to the company.
The outcome: Petronet LNG reported results sharply below expectations. Operating and net profits declined 32% and 28%, respectively, against the September quarter to Rs.316 crore and Rs.178 crore, respectively.
But investors need not lose sleep over this. While the Petronet LNG stock has declined 7% from its annual high in January, it has substantially outperformed broader markets so far this fiscal year. The company has renegotiated the RasGas contract in December-end and that removes a key risk. The worst then could be behind us. Long-term volume is likely to recover in the current quarter. Outlook on spot volume too is not bad. “Huge liquefaction capacities coming up in Australia and US will keep spot LNG prices subdued, resulting in higher demand for spot volume,” point out analysts from Elara Securities (India) Pvt. Ltd.
The Petronet LNG stock trades at 16 times next year’s earnings estimates, factoring in most of the positives. The firm maintains work for expansion of Dahej LNG Terminal from 10 million tonnes per annum (mtpa) to 15 mtpa is on track. The capacity expansion is likely to be completed by year end. Delays on that will not go down well with investors. News flow on pipeline issues at the Kochi Terminal is something investors will have to follow closely.
The writer does not own shares in the above-mentioned companies.