Lingering risks could play spoilsport for Petronet LNG

Petronet LNG Dahej Terminal
Petronet LNG Dahej Terminal

Summary

The escalating competition, with existing terminals being underutilized and additional capacity in the pipeline, poses a potential drawback and might constrain the company's pricing influence

Gas importer Petronet LNG Ltd has grabbed investors’ attention lately with the stock rallying 17% in the past two months.

In December, it inked a pact with Gopalpur Ports Ltd to set up an liquefied natural gas (LNG) terminal in Odisha. This move marks Petronet’s foray into eastern India, complementing its existing terminals in Dahej and Kochi. Also, Reuters reported that Petronet is likely to sign a deal this month to extend its long-term LNG imp-orts from Qatar to beyond 2028. This, if it materializes, offers long-term earnings visibility and an annual escalation in re-gasification charges.

 

Investors are particularly hopeful about a dip in LNG spot prices and strong prospects of LNG demand in the country.

India is likely to experience a notable upswing in LNG imp-orts this year. This surge is exp-ected to be driven by a rise in demand across key sectors like power, industries and transport, alongwith infrastructure development before the national elections, as per S&P Global.

However, worries persist regarding the escalating competition amid the enhancement in domestic gas production capacity. The underutilization of existing terminals with additional capacity in the pipeline could be a drawback and might hit Petronet’s pricing power.

Moreover, Petronet’s largest terminal Dahej, which is strategically located, faces a risk from unified pipeline tariffs implem-entation as tariffs would bec-ome uniform, improving the viability of competing terminals. Also, the company’s ambitious diversification plans have been a concern. In Q2FY24, Petronet announced its entry into the petrochemicals business, diversifying from the core business with a planned capital expenditure of over 20,000 crore, up from its earlier guidance of around 14,000 crore.

This has raised concerns of allocation of funds into a non-core business. The worry is understandable because the petrochemicals business is volatile and doesn’t have meaningful synergies with Petronet’s core LNG re-gasification business. Also, Petronet, a gas utility, has no competitive advantage as petrochemicals is a new and unrelated vertical for it.

Despite that, Petronet’s management is confident about the prospects of the petrochemicals business, saying that the business environment is likely to be favourable for the sector by FY30. But considering that pet- rochemical businesses of GAIL, ONGC, IOC and BPCL are struggling to fetch favourable business returns, it remains to be seen how this pans out for Petronet.

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