Petronet LNG Ltd

Petronet LNG Limited, one of the fastest growing world-class companies in the Indian energy sector, has set up the country's first LNG receiving and regasification terminal at Dahej, Gujarat, and another terminal at Kochi, Kerala. While the Dahej terminal has a nominal capacity of 15 MMTPA, the Kochi terminal has a capacity of 5 MMTPA. The company is in the process to build a third terminal at Gangavaram, Andhra Pradesh.

Formed as a Joint Venture by the Government of India to import LNG and set up LNG terminals in the country, it involves India's leading oil and natural gas industry players. Its promoters are GAIL (India) Limited (GAIL), Oil & Natural Gas Corporation Limited (ONGC), Indian Oil Corporation Limited (IOCL) and Bharat Petroleum Corporation Limited (BPCL).

Business Model
Petronet acts as a converter and distributor of gas with one of the largest regsification terminal in the country. It imports Liquidified Natural Gas (LNG) from its global vendors at a pre-determined pricing formula and takes up regasification of consignment at its terminal. It then distributes the gas to industrial customers through third-party gas pipelines (majorly GAIL’s).

Shift to gas necessary to control pollution:
PLNG is evaluating various options for investments including buying an upstream asset which can bring gas to India at fixed cost. Increased focus of the Chinese government on gas availability, construction of distribution infrastructure and suitable policies aiding consumption helped Chinese gas consumption to grow at CAGR of 16% during 2001-10 and another 10% during 2011-18. India is also facing a similar pollution problem as China. As availability and infrastructure mature, we expect consumption of natural gas to grow, thus benefiting Petronet.

Kochi terminal utilization and Dahej terminal expansion to add to growth:
Petronet’s Kochi terminal is currently under-utilized due to unavailability of pipeline for transportation. It is expected to witness upside in its utilization post the completion of Kochi-Mangalore pipeline. Due to the delay in execution, the pipeline’s entire stretch is expected to be now completed by June 2019. In our view, Petronet will receive additional 1–1.5 mmtpa of gas when the pipeline work gets completed. The company is further expanding its Dahej terminal capacity by 5 mmtpa for an additional investment of Rs. 2,100 crores. The company expects Dahej terminal’s expansion to get completed by June 2019, however full utilization of the capacity will take some time. The existing Dahej terminal is booked for 7.5 mmtpa under RasGas long term volumes while an additional 8.25 mmtpa is booked as regasification capacity, taking the count to more than the current nameplate capacity of 15 MMT.

No major threat from new terminals:
PLNG management seems quite confident of maintaining their pre dominant stature despite start of competing Mundra and Ennore LNG terminals, given their low-cost operations. Also, delay in setting up of gas transmission network will delay their ramp up schedule.After a long gap, large trunk pipelines are being constructed, which along with ninth and tenth round of City Gas Distribution (CGD) bidding, should increase the penetration of gas. As the penetration of gas will improve the market will expand and every player will benefit.

Outlook :
The company is a stable play on gas adoption story in the country. The company’s significant investments in the current infrastructure and envisaged expansion make it one of the best plays in the sector. Its competitive position is further enhanced by strong pipeline connectivity with high gas demand markets.

Global LNG trade stood at 316mmt in 2018. Comparatively, 35.5mmt of LNG liquefaction capacity is expected to be added in 2019 alone. We expect spot LNG prices to remain cheaper than oil and boost consumption. Continuous delays in domestic gas production projects combined with lack of visibility for upcoming LNG terminals are likely to favor Petronet.

Strong free cashflow and limited capex in the near term could result in high dividend payout in FY2019 and FY2020

Financials