praveen
11-11-2007, 09:23 PM
Petronet LNG Limited
Petronet LNG (PLL) operates India’s largest LNG regasification terminal in Gujarat. It is the largest importer of LNG in the country and has posted a net profit of Rs. 115.51cr on the back of strong capacity utilization and higher sales during the 2nd quarter of FY08. It provides about 25% of the total gas supplies in the country and is operating at a capacity of 6.5 mtpa against an installed capacity of 5 mtpa. PLL is in the process of ramping up the capacity of its LNG terminal to 12.5 million tonne per annum (mmtpa) from 5 mmtpa at present, which will be commissioned progressively between July and December 2008. It also plans to increase imports by 2.5 mmtpa from 2009 onwards. The proposed expansion and PLL’s willingness to source small cargoes from the spot LNG market and re-gasify and sell it to the power and fertilizer industries is likely to lead to strong growth in volumes and a stronger growth in profits as the re-gasification charges from such additional spot volumes go straight to the bottom-line. The company presently trades at a FY08 forward PE of 15.5 and FY09 forward PE of 12.2 based on expected earnings for FY08 and FY09 resp.
Industry
The LNG supply scenario the world over has seen a dramatic change in the last two years with the emergence of India, China and USA as new growing LNG markets. The emergence of these huge markets has given a confidence to develop and monetize large stranded gas reserves worldwide. As a result many new LNG projects have been planned. In addition the already existing facilities went in for expansion. The newly added capacity will make the LNG trade grow approximately three fold in the next 10 years. At the end of 2006, the global LNG capacity was 170 MMTPA. Another 120 MMTPA facility is under construction and a 200 MMTPA capacity addition is at different stages of planning. The new planned and under execution capacity will take the LNG trade to 20% of global gas consumption from its current level of 7%. The LNG demand scenario in India is changing fast with increased requirement of natural gas by a large number of industries as the Government encourages major users like power and fertilizer industries to use spot LNG instead of the costly naphtha as a fuel and feed stock. The working group on Petroleum and Natural Gas Sector for the 11th Plan has projected a demand of natural gas for 2007-08 at 179.17 million standard cubic metre per day (mscmd). The average availability of natural gas in the country in 2006-07 was around 96 mscmd, including 23 mscmd of re-gasified LNG. The shortfall in demand and supply is met by imports. During 2006-07, about 6.95 mt of LNG was imported which is equivalent to about 23 mscmd of regasified LNG. To bridge the gap between demand and supply for the domestic market, import of gas as LNG is required and this needs additional LNG infrastructure.
India holds large deposits of natural gas to meet the existing and new demand for natural gas. Four LNG terminals at various coastal locations including an expansion of existing Dahej terminal will be operational by the year 2010-11 to meet the regional demands for natural gas in the country. LNG is expected to occupy 30% share of gas supplies in India very soon. Much of the growth of LNG in India is likely to fuel electricity generation, but infrastructure projects are also underway for natural gas to displace polluting home heating, cooking, and transport fuels in major urban areas. India being an agriculturebased country needs natural gas for power generation, urea production and other industrial usages. Currently large quantities of liquid fuel are being used by these various sectors of the economy to meet their needs.
Two core sectors i.e. power and fertilizer, dominate the Indian gas sector demand. These two core sectors together generate 72% of total gas demand in the country. The other sectors like steel, chemicals and petrochemicals, glass and ceramics contribute to about 10% of the demand. Sectors where demand is growing fast however are refineries, city gas, etc. Government has formulated policies to aggressively pursue the use of CNG in transport sector in more than 55 cities in the country to reduce vehicular emissions and pollution.
Company
Petronet LNG was incorporated in 1998 for importing and utilizing Liquefied Natural Gas (LNG). The company was formed as a joint venture company promoted by four of India's Oil and Gas majors viz. BPCL, GAIL, IOC and ONGC, which together hold 50% of its post-issue capital. PLL also roped in a leading global LNG player Gas de France as a strategic investor (10% stake) to provide technical assistance during the initial phase of operations. PLL is having LNG import and regasification facilities with a capacity to import, store and regasify 5MMTPA of LNG at Dahej. The facilities include LNG receiving and regasification terminal, marine works and unloading facilities.
The company has contracted RasGas, Qatar, to supply up to 5MMTPA of LNG for a 25-year period, and transport this to its Dahej terminal.PLL would regasify the LNG into natural gas and the entire quantity will be sold to GAIL, IOC and BPCL in a 60:30:10 ratio, as per a 25-year contract. PLL is, therefore, assured of supply as well as a ready
customer base.
The company is in the process of expanding the capacity of its Dahej terminal from 5 mmtpa to 12.5 mmtpa and creating a LNG regasification capacity of 2.5 mmtpa at its Kochi LNG terminal with provision for expansion to 5 mmtpa. PLL has already entered into agreements with RasGas, Qatar for supply of 2.5 million tonnes of LNG by 2009. The total supply contract at present is for 6.5 mmtpa.All the contracts are with the flexibility to supply the gas at any of the PLL terminals in the country.
Key Investment Arguments
Petronet has a market cap of Rs. 6716.3cr, average daily volume of 2465804 shares for the last six months and net sales of Rs.6336.3cr during the trailing twelve months ended Sept 2007.
It’s EBITDA and Net profit margins were at 12.4% and 5.7% resp.in FY07. EBITDA and Net profit margins have subsequently improved in 1st Half of FY08 to 13.8% and 6.9% resp.
The company has commenced operations in the year 2004-05 only. Since then, it has achieved a 2-year CAGR of 68.3% in revenues and 104.5% in EBITDA. Its net profits grew more than 60% in FY07 over FY06 after registering a loss of Rs. 28.45cr in FY05, its first year of operations.
Petronet trades at a PE multiple of 16.2 based on trailing twelve month (TTM) earnings, Price to Book ratio of 5.3 on FY07 bookvalue and Price to Sales ratio of 1.1 based on TTM net sales.
Debt-equity ratio of Petronet was at 1.1 for FY07, registering a steady decline since FY05.
Petronet LNG expects to get 3.5 mmtpa of gas from the Chevronoperated Gorgon project in Australia for 25 years beginning 2011- 12. Two more meetings are scheduled, one in November and the other in January before the deal is finalized.
Natural gas demand is expected to grow by about 7% during the next 5 to 10 years. A demand of 281 MMSCMD of LNG has been projected for the year 2011-12. The majority of this demand is expected to come from the power and fertilizer sectors. The steps taken by refineries, city gas distribution and CNG sectors will also add to substantial demand for LNG.
Petronet has ventured into power production to maintain existing profit lines. This diversification is more of a risk mitigating exercise so as to protect the capacity of LNG it plans to produce at its two LNG re-gasification terminals at Dahej and Kochi. PLL expects to put another power plant once the current project is successfully implemented. Cost of putting up the plant will be comparatively low due to greater extent of synergies involved.
Petronet also plans to diversify into shipping business through a proposed subsidiary. It plans to have joint ventures with shipping companies and operators selected to transport gas for it. The new subsidiary would hold 49% stake in such ventures with the ship owners and operators holding the balance 51%. The company would require 10 new ships in the coming years. To begin with, it requires two new LNG ships for its green-field re-gasification terminal of 2.5 mmtpa capacity proposed at Kochi. With plans to raise the terminal capacity to 5 mmtpa, PLL would require two more LNG ships depending on the quantity being sourced. For its existing Dahej terminal, PLL would require additional three ships taking the total number to six once the capacity expansion is completed.
Petronet has, over the last two years, been sourcing small cargoes from the spot LNG market and processing them for buyers mainly from the power and fertilizer sectors. Given that the buoyancy in earnings can come only from higher re-gasification volumes, Petronet's strategy to develop a spot and short-term market for gas is a major plus for its earnings growth prospects. The regasification charges from additional spot and short-term volumes go straight to the bottom-line as the fixed costs are fully absorbed over the installed capacity. This fiscal, Petronet will be sourcing 1.5 million tonnes of LNG from the short-term market for the Dabhol power project; this will take its total re-gasification volumes to 6.5 million tonnes. Petronet's has plans to expand capacity at Dahej to 12.5 million tonnes by 2008-09 for which the finances have been tied up. This is a positive but much would depend on how successful it is in sourcing long-term LNG at competitive rates. What could come to its aid though is that liquid fuel alternatives that power and fertilizer producers use, such as naphtha and fuel oil, cost upward of $12 per MBTU which makes LNG even at $8 per MBTU an economical option. The best part of the expansion plans is that Petronet gets the right to market the capacity over and above 7.5 million tonnes which will enable it to partake in marketing margins. Petronet's long-term plan to set up a second LNG jetty at Dahej and two more LNG storage tanks in association with Gujarat State Petronet will give it greater flexibility. With additional investment in re-gasification, the overall capacity of the Dahej complex can be taken past 20 mmtpa.
Key Concerns
A number of private players are ready to jump into the LNG segment, including MNC majors such as Shell and British Gas. The current agreed price between PLL and RasGas stands only for the first five years after which it shall be revised. Both these factors could affect the margins of Petronet in a competitive market situation. Given the fluctuations in global LNG prices, long-term supply deals are becoming less and less common.
Petronet’s profit margins of around 52 cents on 1 mmbtu of R-LNG are under pressure as a lot of new discoveries are being made in the country by Reliance Industries, GSPC and ONGC. Also, the recent move to fix the Reliance gas price at around $6 per mmbtu
(as the delivered price including taxes and duties) for which Petronet currently charges $11 per mmbtu, is likely to affect margins. The company believes the best way to protect the margin is to get into the Power generation business where in they will not have to pay the 12.5% VAT (which translates into $1.15 per mmbtu), no marketing margins (which currently stands at 12 cents per mmbtu). Also since the power plant is at the Dahej site there will be no transportation charges to GAIL, which will be a savings of 67 cents per mmbtu. With these savings, PLL will be able to maintain its 52 cents profit margin which comes from one mmbtu of gas.
Latest Developments
PLL’s board has approved a proposal to conduct a feasibility study for setting up a 1,200 MW power plant at Dahej, Gujarat at an estimated cost of Rs. 3,000cr.
Petronet has been seeking LNG to secure energy supplies as demand grows in Asia's third-largest consumer. During September the company signed a draft agreement with Exxon Mobil Corp to buy 2.5 million tonnes of LNG a year from Australia's Gorgon
project for 25 years. It is also looking to secure a contract with Sonatrach of Algeria for a 25-year contract to import 1.25 mtpa.
Conclusion
This is a good stock to buy at the current market price of Rs. 89.55. If everything goes well, the price is likely to appreciate to Rs. 119.0, within 12 months, translating into a gain of about 33%.
Petronet LNG (PLL) operates India’s largest LNG regasification terminal in Gujarat. It is the largest importer of LNG in the country and has posted a net profit of Rs. 115.51cr on the back of strong capacity utilization and higher sales during the 2nd quarter of FY08. It provides about 25% of the total gas supplies in the country and is operating at a capacity of 6.5 mtpa against an installed capacity of 5 mtpa. PLL is in the process of ramping up the capacity of its LNG terminal to 12.5 million tonne per annum (mmtpa) from 5 mmtpa at present, which will be commissioned progressively between July and December 2008. It also plans to increase imports by 2.5 mmtpa from 2009 onwards. The proposed expansion and PLL’s willingness to source small cargoes from the spot LNG market and re-gasify and sell it to the power and fertilizer industries is likely to lead to strong growth in volumes and a stronger growth in profits as the re-gasification charges from such additional spot volumes go straight to the bottom-line. The company presently trades at a FY08 forward PE of 15.5 and FY09 forward PE of 12.2 based on expected earnings for FY08 and FY09 resp.
Industry
The LNG supply scenario the world over has seen a dramatic change in the last two years with the emergence of India, China and USA as new growing LNG markets. The emergence of these huge markets has given a confidence to develop and monetize large stranded gas reserves worldwide. As a result many new LNG projects have been planned. In addition the already existing facilities went in for expansion. The newly added capacity will make the LNG trade grow approximately three fold in the next 10 years. At the end of 2006, the global LNG capacity was 170 MMTPA. Another 120 MMTPA facility is under construction and a 200 MMTPA capacity addition is at different stages of planning. The new planned and under execution capacity will take the LNG trade to 20% of global gas consumption from its current level of 7%. The LNG demand scenario in India is changing fast with increased requirement of natural gas by a large number of industries as the Government encourages major users like power and fertilizer industries to use spot LNG instead of the costly naphtha as a fuel and feed stock. The working group on Petroleum and Natural Gas Sector for the 11th Plan has projected a demand of natural gas for 2007-08 at 179.17 million standard cubic metre per day (mscmd). The average availability of natural gas in the country in 2006-07 was around 96 mscmd, including 23 mscmd of re-gasified LNG. The shortfall in demand and supply is met by imports. During 2006-07, about 6.95 mt of LNG was imported which is equivalent to about 23 mscmd of regasified LNG. To bridge the gap between demand and supply for the domestic market, import of gas as LNG is required and this needs additional LNG infrastructure.
India holds large deposits of natural gas to meet the existing and new demand for natural gas. Four LNG terminals at various coastal locations including an expansion of existing Dahej terminal will be operational by the year 2010-11 to meet the regional demands for natural gas in the country. LNG is expected to occupy 30% share of gas supplies in India very soon. Much of the growth of LNG in India is likely to fuel electricity generation, but infrastructure projects are also underway for natural gas to displace polluting home heating, cooking, and transport fuels in major urban areas. India being an agriculturebased country needs natural gas for power generation, urea production and other industrial usages. Currently large quantities of liquid fuel are being used by these various sectors of the economy to meet their needs.
Two core sectors i.e. power and fertilizer, dominate the Indian gas sector demand. These two core sectors together generate 72% of total gas demand in the country. The other sectors like steel, chemicals and petrochemicals, glass and ceramics contribute to about 10% of the demand. Sectors where demand is growing fast however are refineries, city gas, etc. Government has formulated policies to aggressively pursue the use of CNG in transport sector in more than 55 cities in the country to reduce vehicular emissions and pollution.
Company
Petronet LNG was incorporated in 1998 for importing and utilizing Liquefied Natural Gas (LNG). The company was formed as a joint venture company promoted by four of India's Oil and Gas majors viz. BPCL, GAIL, IOC and ONGC, which together hold 50% of its post-issue capital. PLL also roped in a leading global LNG player Gas de France as a strategic investor (10% stake) to provide technical assistance during the initial phase of operations. PLL is having LNG import and regasification facilities with a capacity to import, store and regasify 5MMTPA of LNG at Dahej. The facilities include LNG receiving and regasification terminal, marine works and unloading facilities.
The company has contracted RasGas, Qatar, to supply up to 5MMTPA of LNG for a 25-year period, and transport this to its Dahej terminal.PLL would regasify the LNG into natural gas and the entire quantity will be sold to GAIL, IOC and BPCL in a 60:30:10 ratio, as per a 25-year contract. PLL is, therefore, assured of supply as well as a ready
customer base.
The company is in the process of expanding the capacity of its Dahej terminal from 5 mmtpa to 12.5 mmtpa and creating a LNG regasification capacity of 2.5 mmtpa at its Kochi LNG terminal with provision for expansion to 5 mmtpa. PLL has already entered into agreements with RasGas, Qatar for supply of 2.5 million tonnes of LNG by 2009. The total supply contract at present is for 6.5 mmtpa.All the contracts are with the flexibility to supply the gas at any of the PLL terminals in the country.
Key Investment Arguments
Petronet has a market cap of Rs. 6716.3cr, average daily volume of 2465804 shares for the last six months and net sales of Rs.6336.3cr during the trailing twelve months ended Sept 2007.
It’s EBITDA and Net profit margins were at 12.4% and 5.7% resp.in FY07. EBITDA and Net profit margins have subsequently improved in 1st Half of FY08 to 13.8% and 6.9% resp.
The company has commenced operations in the year 2004-05 only. Since then, it has achieved a 2-year CAGR of 68.3% in revenues and 104.5% in EBITDA. Its net profits grew more than 60% in FY07 over FY06 after registering a loss of Rs. 28.45cr in FY05, its first year of operations.
Petronet trades at a PE multiple of 16.2 based on trailing twelve month (TTM) earnings, Price to Book ratio of 5.3 on FY07 bookvalue and Price to Sales ratio of 1.1 based on TTM net sales.
Debt-equity ratio of Petronet was at 1.1 for FY07, registering a steady decline since FY05.
Petronet LNG expects to get 3.5 mmtpa of gas from the Chevronoperated Gorgon project in Australia for 25 years beginning 2011- 12. Two more meetings are scheduled, one in November and the other in January before the deal is finalized.
Natural gas demand is expected to grow by about 7% during the next 5 to 10 years. A demand of 281 MMSCMD of LNG has been projected for the year 2011-12. The majority of this demand is expected to come from the power and fertilizer sectors. The steps taken by refineries, city gas distribution and CNG sectors will also add to substantial demand for LNG.
Petronet has ventured into power production to maintain existing profit lines. This diversification is more of a risk mitigating exercise so as to protect the capacity of LNG it plans to produce at its two LNG re-gasification terminals at Dahej and Kochi. PLL expects to put another power plant once the current project is successfully implemented. Cost of putting up the plant will be comparatively low due to greater extent of synergies involved.
Petronet also plans to diversify into shipping business through a proposed subsidiary. It plans to have joint ventures with shipping companies and operators selected to transport gas for it. The new subsidiary would hold 49% stake in such ventures with the ship owners and operators holding the balance 51%. The company would require 10 new ships in the coming years. To begin with, it requires two new LNG ships for its green-field re-gasification terminal of 2.5 mmtpa capacity proposed at Kochi. With plans to raise the terminal capacity to 5 mmtpa, PLL would require two more LNG ships depending on the quantity being sourced. For its existing Dahej terminal, PLL would require additional three ships taking the total number to six once the capacity expansion is completed.
Petronet has, over the last two years, been sourcing small cargoes from the spot LNG market and processing them for buyers mainly from the power and fertilizer sectors. Given that the buoyancy in earnings can come only from higher re-gasification volumes, Petronet's strategy to develop a spot and short-term market for gas is a major plus for its earnings growth prospects. The regasification charges from additional spot and short-term volumes go straight to the bottom-line as the fixed costs are fully absorbed over the installed capacity. This fiscal, Petronet will be sourcing 1.5 million tonnes of LNG from the short-term market for the Dabhol power project; this will take its total re-gasification volumes to 6.5 million tonnes. Petronet's has plans to expand capacity at Dahej to 12.5 million tonnes by 2008-09 for which the finances have been tied up. This is a positive but much would depend on how successful it is in sourcing long-term LNG at competitive rates. What could come to its aid though is that liquid fuel alternatives that power and fertilizer producers use, such as naphtha and fuel oil, cost upward of $12 per MBTU which makes LNG even at $8 per MBTU an economical option. The best part of the expansion plans is that Petronet gets the right to market the capacity over and above 7.5 million tonnes which will enable it to partake in marketing margins. Petronet's long-term plan to set up a second LNG jetty at Dahej and two more LNG storage tanks in association with Gujarat State Petronet will give it greater flexibility. With additional investment in re-gasification, the overall capacity of the Dahej complex can be taken past 20 mmtpa.
Key Concerns
A number of private players are ready to jump into the LNG segment, including MNC majors such as Shell and British Gas. The current agreed price between PLL and RasGas stands only for the first five years after which it shall be revised. Both these factors could affect the margins of Petronet in a competitive market situation. Given the fluctuations in global LNG prices, long-term supply deals are becoming less and less common.
Petronet’s profit margins of around 52 cents on 1 mmbtu of R-LNG are under pressure as a lot of new discoveries are being made in the country by Reliance Industries, GSPC and ONGC. Also, the recent move to fix the Reliance gas price at around $6 per mmbtu
(as the delivered price including taxes and duties) for which Petronet currently charges $11 per mmbtu, is likely to affect margins. The company believes the best way to protect the margin is to get into the Power generation business where in they will not have to pay the 12.5% VAT (which translates into $1.15 per mmbtu), no marketing margins (which currently stands at 12 cents per mmbtu). Also since the power plant is at the Dahej site there will be no transportation charges to GAIL, which will be a savings of 67 cents per mmbtu. With these savings, PLL will be able to maintain its 52 cents profit margin which comes from one mmbtu of gas.
Latest Developments
PLL’s board has approved a proposal to conduct a feasibility study for setting up a 1,200 MW power plant at Dahej, Gujarat at an estimated cost of Rs. 3,000cr.
Petronet has been seeking LNG to secure energy supplies as demand grows in Asia's third-largest consumer. During September the company signed a draft agreement with Exxon Mobil Corp to buy 2.5 million tonnes of LNG a year from Australia's Gorgon
project for 25 years. It is also looking to secure a contract with Sonatrach of Algeria for a 25-year contract to import 1.25 mtpa.
Conclusion
This is a good stock to buy at the current market price of Rs. 89.55. If everything goes well, the price is likely to appreciate to Rs. 119.0, within 12 months, translating into a gain of about 33%.