Petronet LNG has gained more than 32% since the closing lows of Rs 122.77 in May’12. The company has been benefitting from growing gas demand while supply, on the other hand, has been under pressure further after production declined from the KG basin. Petronet’s volumes recovered to 135 Trillion British Thermal Units (TBTU) or 2.6 MT (million tons), in September’12 quarter compared to 127 TBTU in June’12 quarter.
The new PNGRB regulations on LNG terminals do not impact the company’s profitability. The company having 10 MTPA capacities at Dahej in Gujarat is likely to commission its 5 MTPA Kochi capacities by March’13 quarter. However, in the absence of pipeline infrastructure that is still to be completed the contributions from Kochi may remain limited to 1 MTPA only, feel analysts. Thus, the benefits from the new capacities will not accrue in near term. However, strong gas demand and benefits of capacity ramp-up accruing over the medium term lead to one year consensus target price for the stock at Rs 180 as per Bloomberg data. The stock currently trades at Rs 161 levels.
Kochi terminal
While one expects the 5 MTPA Kochi terminus to be completed and ramped-up in the current fiscal (FY13) only however the utilization is likely to get jeopardized with the non-availability of pipeline infrastructure. The pipeline infrastructure that is crucial for transmission of gas in the South Indian markets (states of Karnataka and Kerala). Petronet from the Kochi terminal would address customers as NTPC Kayamkulam, BSES power Kochi, Kasargod Power Station, KPCL Bidadi near Bangalore, and Mangalore Chemicals and Fertilizers.
However the pipeline infrastructure from Kochi to Bangalore (Kochi – Kanjarkkod – Mangalore – Bangalore) is yet to be completed facing various obstacles. Analysts see Kerala’s difficult terrain as one of the key challenges. Further farmer’s compensation is among other issues that is causing hurdles.
Vinay Nair at Karvy stock broking observes s that although, the 5 MTPA project is on schedule to be commission fully by March quarter, we see many external challenges to ramp up the terminal optimally. We hope for a repeat of success story in Dahej Terminal, however with higher LNG price, more difficult terrain, and relative lower consumer affordability challenges seem to be galore.
Regulatory issues – not a concern
On the positive side t he hangover of regulatory issues related to marketing margins or to LNG terminal eligibility doe not impact Petronet. The petroleum ministry has recently notified the eligibility conditions for registration of LNG terminals for which the gazette notification was published on 31 October 2012, and the government press release was issued only on 16 November 2012. Under this the eligibility conditions, among others, include the requirement of common carrier capacity of 20% of short-term (less than 5 year contract) un-committed capacity subject to minimum of 0.5mmtpa. In simpler terms this regulation is mandatory for new terminals that will have to fore go marketing or re-gasification margins for certain part of their spot contracts. This however is not likely to impact Petronet LNG.
The company’s Dahej terminal has been operational for long and even its Kochi terminal has been registered well before the date of applicability of this eligibility condition. Analysts at Nomura observe that as per the notification, only entities desirous of establishing or operating a LNG terminal after the establishment of the Petroleum and Natural Gas Regulatory Board (PNGRB) (ie. October 2007) would have to comply. The Dahej terminal of Petronet LNG (2004) and the Hazira terminal of Shell/Total (2005) started operations much before PNGRB was established. Even the upcoming terminals (Kochi and Dabhol) would not be impacted by these notifications. “Both these terminals were planned Much before the regulator was set up” add analysts.