Gujarat Gas: Retain ‘buy’ with unchanged Rs 920 PT

The current Spot LNG price is equivalent to crude > $ 100/bbl.

Key takeaway: Fesharaki expects the LNG market to remain tight over CY 21-25E keeping Spot LNG price on the higher side but prices could still moderate to $ 12-13/mmbtu from the abnormally high level of $ 18/mmbtu currently, as the heatwave in Asia fades and European stock rebuilds. Our analysis suggests GUJGA’s recent price hikes bake in Spot LNG of ~ $12/mmbtu suggesting a further price hike is required if Spot LNG sustains at current levels. Maintain ‘buy’.

Spike in Spot LNG prices driven by coal to gas conversion and restricted LNG supply: Spot LNG has risen sharply to ~$18/mmbtu driven by higher carbon prices driving coal to gas conversion in Europe while the supply of LNG has been limited, too. The current Spot LNG price is equivalent to crude > $ 100/bbl.

Asian LNG prices expected to moderate from recent highs but very unlikely to fall below US$ 12-13/mmbtu: Fesharaki still expects low Europe storage levels as we head into Winter. Gazprom is also not utilising capacity to transmit gas through Ukraine. Higher carbon prices provide support to the European gas market since gas prices can be high but still outperform coal. Fesharaki though expects some pullback in prices to $ 12-13/mmbtu as the heatwave in Asia fades and stocks in Europe rebuild.

Higher Spot LNG prices need not result in new projects: The spike in Spot LNG need not translate to new projects coming up since > 75% of the LNG market is still indexed to oil. Fesharaki is greatly in favour of oil indexed pricing since it prevents extreme price movements as oil indexation allows it to benefit indirectly from OPEC stability.

LNG market can be split into four phases and a tight market is ahead: 2019-20: Long LNG market (strong supply). 2021-25: Tight LNG market (strong demand but lack of 2016-17 FIDs and construction delays causes supply to dry up). 2026-28: Oversupplied LNG market (Projects with FIDs in 2018-19 hit the market resulting in excess supply led by Qatar expansions and other new projects). From 2029: Tight LNG market (new FIDs needed to bridge supply/demand gap)

Spot LNG exposure has reduced for GUJGA but still remains high: While the new HPHT dom gas contracts (0.7 mmscmd RIL and 1.3 mmscmd Vedanta) have helped in reducing Spot LNG exposure, we estimate Spot LNG to contribute ~ 50% of industrial gas sourcing under a normal demand scenario.

Recent price hike taken by GUJGA appears to bake in ~ $ 12/mmbtu Spot LNG — Further hike needed at current levels: Our analysis suggests the recent 12% price hike taken by GUJGA bakes in $ 11.5-12.5/mmbtu of Spot LNG. This would be good enough if Spot LNG moderates to $ 12-13/mmbtu over the next few months (as expected by Fesharaki). But the LNG market remains tight over 2021-25 in his view and if Spot LNG sustains near $ 15/mmbtu (currently $ 18/mmbtu), we think a further price hike of Rs 3-4/scm could be required by GUJGA.

Pricing power of GUJGA gives us comfort on steady state margins; Maintain ‘buy’: Limited competition and the likely 15% price hike expected to be taken by customers in Morbi provides us comfort on the pricing power of GUJGA prompting us to retain ‘buy’ with an unchanged Rs 920 PT despite a soft near-term outlook.

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