|Media reports have yet again highlighted irregularities in LNG agreements signed by Petronet LNG (PLNG) with Qatar's RasGas. Such reports have frequently surfaced over the past couple of years. The Ministry of Petroleum and Natural Gas (MOPNG) had conducted an internal probe last year and had not found any irregularities. Our discussions with the management and primary data sources in this regard suggest that the renegotiation was done: (a) on commercial grounds of expediting the ramp up of the Dahej terminal and (b) after taking due approvals from PLNG's Board, promoters and the MOPNG.
Event: Media reports suggest that a former secretary to the Indian Government has written to the Prime Minister's Office alleging irregularities in LNG agreements signed by PLNG with RasGas. The Ministry of Petroleum and Natural Gas (MOPNG) appears to have ordered a fresh enquiry into the above deal, according to media reports.
Our view: The allegation is related to the tranche-2 LNG volume of 2.5mmtpa (over and above the original tranche-1 volume of 5mmtpa being supplied at Dahej) that was to be supplied by RasGas for the Kochi terminal. But as the construction of the Kochi terminal was delayed, PLNG renegotiated the contract with RasGas in 2005, to supply the tranche-2 volume to Dahej (instead of Kochi) and advance the supply by five years. But as RasGas did not have adequate availability of rich gas, the renegotiation terms allowed RasGas to supply rich gas only on a 'best-endeavour' basis rather than the contractual commitment. (Rich gas contains compounds like propane and butane from which LPG and other petrochemicals can also be produced as compared to lean gas, which can only be used as burning fuel.) The allegation is that PLNG is getting only ~6.5mmtpa of rich gas from RasGas versus the original agreement for 7.5mmtpa, though the pricing terms were not changed, causing a loss of Rs270bn to the country.
We spoke to the management and our primary data sources in this regard. The management has denied any irregularities and has stated that the re-negotiation was approved by the Board of Directors after seeking approval from the MOPNG and all the four promoters (ONGC, BPCL, GAIL and IOCL). Note that the MOPNG had already probed the deal last year and no irregularities were found. Our understanding suggests that the re-negotiation was done: (a) on commercial grounds of expediting the ramp up of the Dahej terminal, and (b) after taking due approvals from PLNG's Board, promoters and the MOPNG.
Where do we go from here? We reiterate our positive view on PLNG due to continued tightness in the domestic gas demand-supply balance. The company's proactive capacity expansion will only strengthen its competitive position in the LNG regasification business. Our positive view is based on strong volume growth expectation (FY13-20 CAGR of 11%) and is not contingent on strong regas/marketing margin. The market has been concerned on the utilisation of the Kochi terminal primarily due to: (a) uncertainty on the commissioning of Phase II of the pipeline, which will carry gas from the Kochi terminal to Bangalore and Mangalore, and (b) limited visibility on demand potential. We are cognizant of these concerns given that Kochi is a new market for gas, and hence we had already assumed a slow ramp up of the Kochi terminal, starting at 10% utilisation in FY14 and achieving 100% utilisation only in the fifth year of operation (i.e. FY18). The key triggers for the stock are: (a) the signing of the 3-4mmtpa longterm LNG contract, which provides volume visibility for Kochi terminal, and (b) end of the regulatory overhang on marketing and regas margin. The stock is currently trading at reasonable valuations-FY14 P/E of 10.8x and FY14 P/B of 2.1x.