Growth prospects upbeat for gas players

Pressure on natural gas prices will drive earnings of gas companies

The pressure on natural gas prices persists, led by a larger-than-expected climb in US supplies. The expectations are that gas prices will remain under pressure moving forward as well. This should lend support to prospects of gas processing and distribution companies such as GAIL, Indraprastha Gas, Gujarat Gas and Mahanagar Gas, as well as imported gas receivers and re-gasification companies such as Petronet LNG.

The lower gas prices are positive given the surge in demand helping all the players in the space and this is expected to continue. Analysts at Elara Capital say that global liquefied natural gas (LNG) supply would witness, about 57 million tonnes (or 21 per cent) growth during calendar years 2016-18  led by new supplies from the US and Australia. This means that spot LNG prices would decline and become economical and fuel industrial demand. Elara expects doubling of industrial gas demand by FY22.

Analysts at Ambit Capital, too, say global demand-supply trends suggest LNG prices could face further downward pressure in FY18 which should lead to higher off-take from industrial, consumer and refinery/petchem segments which will boost demand over FY17-20.

With surge in overall demand, GAIL will continue to benefit on transmission volumes. The lower imported gas prices have already been helping GAIL turn around its petrochemical business. It has also helped in the liquefied petroleum gas (LPG) segment with imported natural gas being the feed stock for both segments.  There are concerns on higher priced contracts for upcoming US LNG (starting March 2018) which needs to be watched out for.

For Petronet LNG, lower spot LNG prices as well as ramped up Dahej capacities and improving Kochi utilisations are expected to drive earnings. Given the visibility of revenue and profit growth, high return on equity at 22 per cent in FY19 and possibility of decent growth beyond FY19 keep analysts at HDFC Securities positive on the stock.

The gas distribution companies while on one hand will benefit from city gas distribution demand, the other segments which can aid its financials is the higher industrial and compressed natural gas orders. Gujarat Gas, having larger exposure to the industrial segment, remains a good beneficiary from new ceramic plants coming up and could see more gains from removal of the ban on new chemical plants in the Vapi-Valsad-Ankleshwar region, as also from city gas distribution in Daman, Thane and other regions. 

For Mahanagar Gas, strong gas pipeline infrastructure and expanding operations in Mumbai, its adjoining areas and Raigad district will enable the company to reap the benefits. For Indraprastha Gas (IGL), being a city gas supplier in National Capital Region (NCR) will help given the ban on fuel oils and pet coke usage in the NCR as also large untapped opportunities. Analysts at Axis Capital say continued quarterly volume outperformance in FY18, authorisation of new areas, resolution of Gurgaon/Faridabad authorisations and cut in UP state value added tax on piped natural gas are triggers for IGL.