Stockwatch: In driver’s seat amid bad news

The saying ‘one man’s loss is another man’s treasure’ fits the Gas Authority of India Limited, or GAIL, beautifully. GAIL is gaining from the loss in gas production at Reliance Industries (RIL). A sharp drop in RIL’s gas production has left many companies, especially fertiliser and power majors, desperately looking for fuel. Industries were severely hit by this shortfall. In fact, at one point, the Andhra government had sought New Delhi’s intervention.

Gas users have to either find a new supplier or convert their facilities to non-gas fuels. This is where state-owned companies like GAIL and Petronet LNG have come to their rescue. Both companies have been desperately searching for natural gas in international markets.

On Andhra government’s request, the oil ministry intervened, directing GAIL and Reliance (the company which could not meet the demand due to loss of production) to supply gas to power plants by swapping Krishna Godavari Basin D6 gas with imported gas, that too at imported price. Though companies in the sector have been hit lately by a directive by the Petroleum and Natural Gas Regulatory Board (PNGRB) to control gas distribution prices, both GAIL and Petronet are likely to be least impacted as they derive a big chunk of their revenues from liquefied natural gas (LNG) and their growth plan is also tilted in favour of LNG.

GAIL has been aggressively looking at sourcing LNG from international markets. In fact, GAIL, along with Andhra Pradesh Gas Infrastructure Corp, has signed an agreement with French power major GDF Suez SA, to set up India’s first 3.5 million tonne (mt) capacity floating liquefied gas terminal off Andhra coast at an investment of Rs2,000 crore. The project is expected to be commissioned by the end of 2013. A floating LNG terminal has many advantages over conventional land terminals: it is faster to commission — 18 months instead of six years; no land purchase and clearance issues and much lower capital.

Also, GAIL has a 20-year contract with Cheniere Energy for supply of 3.5 million tonne per annum of LNG. It is looking at medium-term (12 months) import contracts and Russia, West Asia and South East Asia are on the radar to meet the growing demand for LNG. The company is even considering imports from the US where the price of gas is $3.5 per million Btu. At $11, the price is still favourable compared to $12-15 in Asia.

GAIL has an immediate LNG requirement of 2 million tonnes which will increase to 5 million tonnes by 2016-17.  It said recently that it will sign a supply agreement for 2 million tonnes annually for a period of three years. This gas will be fed through its 5-mtpa gas terminal at Dabhol.

GAIL has increased its target for transporting natural gas from its 2011-12 level of 118 million metric standard cubic metre per day (mmscmd) to 121.55 mmscmd in this fiscal. This apart, its marketing target for natural gas has been set at 85.75 mmscmd.

However, the company is attracting a series of negative news. Moody’s has recently downgraded GAIL, along with ONGC, aligning it with India’s lower rating. This would lead to a higher borrowing cost for the company. Furthermore, rising and unpaid subsidies have strained GAIL’s balance sheet.

Its stock price - it closed at Rs360.80 on the BSE on Friday — has been on a steady decline for over a year and most of the negatives seem to be in the price. The stock has taken support around Rs350 and can offer a reasonable long-term return as gas will fuel India’s economic growth this decade. Gail is in the driver’s seat.