Petronet exceeded volume estimates for the June quarter.
Petronet exceeded volume estimates for the June quarter.

Fears of balance sheet stress leave Petronet LNG investors jittery

  • Petronet, along with its affiliates, will invest $2.5 bn to purchase 5 mtpa of LNG from Tellurian’s Driftwood project
  • From a more near-term perspective, it helps that volume outlook is robust

Petronet LNG Ltd’s shares fell 5% Monday on the National Stock Exchange after it said it has signed a non-binding memorandum of understanding (MOU) with Tellurian Inc. Sure, the management’s assurance during an investor call that Petronet’s equity investment in Tellurian would be limited up to $1 billion has helped sentiments a bit. Further, Petronet has said that it will enter into back-to-back contracts with off-takers to avoid any volume or pricing risk, which brings comfort.

But Petronet’s shares are still about 3% lower this week. Note that capital allocation has been a key concern for the stock for a while now. In that sense, investors should have welcomed the development. However, fears of potential stress on the balance sheet if Petronet does not receive any help from its affiliates still weigh on the stock, say analysts.

GRaphic by Satish Kumar/Mint
GRaphic by Satish Kumar/Mint

Petronet, along with its affiliates, will invest $2.5 billion to purchase up to 5 million tonnes per annum (mtpa) of liquefied natural gas (LNG) from Tellurian’s Driftwood project. The Driftwood project is setting up a 27.6 million tonne LNG liquefaction capacity, gas transportation pipelines and development of upstream reserves, slated to start commercial production in 2023.

According to SBICAP Securities Ltd, any stock price re-rating in case of Petronet will be contingent on more clarity on the likely IRR profile: a) on equity investment in US liquefaction business; and b) of its offtake agreement with promoters. IRR is internal rate of return, a measure used to evaluate the lucrativeness of an investment. “Please note for the Dahej and Kochi terminals, PLNG has agreed for a 16% project IRR with its offtakers. However, we believe the likely IRR profile on this project might be lower due to: a) muted growth outlook for domestic LNG demand amid a likely jump in domestic gas production in next 2-4 years from RIL’s and ONGC’s KG fields; and b) PLNG’s desperation for an investment opportunity," added SBICAP.

From a more near-term perspective, it helps that volume outlook is robust. Petronet exceeded volume estimates for the June quarter. Analysts expect the company to report strong volume numbers for the September quarter as well. Not surprisingly, despite the weakness in the stock this week, Petronet shares have outperformed the Nifty 200 index so far this calendar year.

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