Key takeaway: Fesharaki expects the LNG marketplace to stay tight more than CY 21-25E maintaining Spot LNG cost on the larger side but costs could nonetheless moderate to $ 12-13/mmbtu from the abnormally higher level of $ 18/mmbtu at present, as the heatwave in Asia fades and European stock rebuilds. Our evaluation suggests GUJGA’s current cost hikes bake in Spot LNG of ~ $12/mmbtu suggesting a additional cost hike is needed if Spot LNG sustains at existing levels. Maintain ‘buy’.
Spike in Spot LNG costs driven by coal to gas conversion and restricted LNG provide: Spot LNG has risen sharply to ~$18/mmbtu driven by larger carbon costs driving coal to gas conversion in Europe whilst the provide of LNG has been restricted, as well. The existing Spot LNG cost is equivalent to crude > $ one hundred/bbl.
Asian LNG costs anticipated to moderate from current highs but really unlikely to fall beneath US$ 12-13/mmbtu: Fesharaki nonetheless expects low Europe storage levels as we head into Winter. Gazprom is also not utilising capacity to transmit gas by way of Ukraine. Higher carbon costs provide assistance to the European gas marketplace considering that gas costs can be higher but nonetheless outperform coal. Fesharaki although expects some pullback in costs to $ 12-13/mmbtu as the heatwave in Asia fades and stocks in Europe rebuild.
Higher Spot LNG costs require not outcome in new projects: The spike in Spot LNG require not translate to new projects coming up considering that > 75% of the LNG marketplace is nonetheless indexed to oil. Fesharaki is considerably in favour of oil indexed pricing considering that it prevents intense cost movements as oil indexation makes it possible for it to advantage indirectly from OPEC stability.
LNG marketplace can be split into 4 phases and a tight marketplace is ahead: 2019-20: Long LNG marketplace (powerful provide). 2021-25: Tight LNG marketplace (powerful demand but lack of 2016-17 FIDs and building delays causes provide to dry up). 2026-28: Oversupplied LNG marketplace (Projects with FIDs in 2018-19 hit the marketplace resulting in excess provide led by Qatar expansions and other new projects). From 2029: Tight LNG marketplace (new FIDs necessary to bridge provide/demand gap)
Spot LNG exposure has lowered for GUJGA but nonetheless remains higher: While the new HPHT dom gas contracts (.7 mmscmd RIL and 1.3 mmscmd Vedanta) have helped in lowering Spot LNG exposure, we estimate Spot LNG to contribute ~ 50% of industrial gas sourcing beneath a regular demand situation.
Recent cost hike taken by GUJGA seems to bake in ~ $ 12/mmbtu Spot LNG — Further hike necessary at existing levels: Our evaluation suggests the current 12% cost hike taken by GUJGA bakes in $ 11.5-12.5/mmbtu of Spot LNG. This would be great sufficient if Spot LNG moderates to $ 12-13/mmbtu more than the next couple of months (as anticipated by Fesharaki). But the LNG marketplace remains tight more than 2021-25 in his view and if Spot LNG sustains close to $ 15/mmbtu (at present $ 18/mmbtu), we assume a additional cost hike of Rs 3-4/scm could be needed by GUJGA.
Pricing energy of GUJGA provides us comfort on steady state margins Maintain ‘buy’: Limited competitors and the most likely 15% cost hike anticipated to be taken by prospects in Morbi delivers us comfort on the pricing energy of GUJGA prompting us to retain ‘buy’ with an unchanged Rs 920 PT in spite of a soft close to-term outlook.