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Business News/ Market / Mark-to-market/  The impact of higher LNG prices this quarter
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The impact of higher LNG prices this quarter

As higher prices affect demand, Petronet LNG is likely to post a weaker financial performance this quarter

Demand from Japan and the progress on the restart of its nuclear reactors would determine much of the trend in LNG prices in the days to come. (Demand from Japan and the progress on the restart of its nuclear reactors would determine much of the trend in LNG prices in the days to come. )Premium
Demand from Japan and the progress on the restart of its nuclear reactors would determine much of the trend in LNG prices in the days to come.
(Demand from Japan and the progress on the restart of its nuclear reactors would determine much of the trend in LNG prices in the days to come. )

The first two months of this quarter saw abnormally high spot liquefied natural gas (LNG) prices. Spot prices in January and February were in the range of $18-20 per million British thermal units (mmBtu) on higher demand because of severe winters, especially from Japan.

As higher prices affect demand, Petronet LNG Ltd—which posted its highest quarterly revenue and net profit in the December quarter—is likely to post a weaker financial performance for the current quarter.

This could lead to lower spot re-gasification sales volumes for the company this time around. According to an analyst, spot volumes attract higher re-gasification tariffs and, hence, lower spot volumes will have a bigger impact on profitability in the March quarter.

The Petronet LNG stock has underperformed the BSE-200 index in 2013 so far and is currently trading at about 10 times estimated earnings for the next fiscal year. Valuations are attractive, but sentiment is lukewarm.

While the December quarter earnings were impressive, management commentary on the progress of the Kochi terminal was not very encouraging at the time of the results announcement in January. In an interview with CNBC-TV18 last week, R.K. Garg, director of finance at Petronet LNG, said that the Kochi terminal commissioning is expected in May-end or early June. In January, when the December quarter earnings were announced, the Kochi terminal commissioning was expected in April. So it’s yet another postponement and investors would do well to track developments on that front.

Meanwhile, when LNG prices are high, city gas distribution companies such as Indraprastha Gas Ltd and Gujarat Gas Co. Ltd also suffer. True, city gas distribution companies have demonstrated good pricing power in the past and have been able to pass on the costs. But that happens with some time lag. Also it’s important to note that a price hike affects demand, too. Who gains when prices are high? “As an importer, no one gains. Everyone loses. The consumer loses even more," said a company official.

What offers relief is that spot LNG prices have started to cool down. Currently, prices are hovering around $15 per mmBtu. But the damage to profit has been done in the current quarter. Going ahead, demand from Japan and the progress on the restart of its nuclear reactors would determine much of the trend in LNG prices in the days to come. While prices have softened recently, LNG demand from Japan is expected to be strong in 2013 as well. Japan’s LNG demand increased substantially after the shutdown of nuclear reactors in the country following the earthquake in 2011.

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ABOUT THE AUTHOR
Pallavi Pengonda
Pallavi is a deputy editor at Mint and heads the Mark to Market team. This column covers wide-ranging topics related to the stock markets, offering an in-depth analysis of financial reports of companies. She writes and edits across verticals, covering the breadth of the Indian stock market. Pallavi has done her master of management studies, specializing in finance.
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Published: 18 Mar 2013, 11:19 AM IST
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