JKM spot LNG prices, which fell from record highs in Jan'21 to US$5.6/mmbtu in Mar'21, have rebounded to US$12.1/mmbtu. Low gas inventories in North Asia and Europe (at 3-year low) due to cold winters and outages at LNG export plants, have meant the two regions are competing with each other for supply thereby, leading to surge in both European gas and Asian spot LNG prices. GAIL is set to gain from oil and spot LNG surge, which augurs well for its FY22-FY23E gas marketing EBITDA outlook. Higher underlying prices mean higher deepwater, APM gas price and upside of 1-10% to OIL's FY22-FY23E EPS and 2% to RIL's FY23E EPS. We estimate Gujarat Gas' (GGL) margins to rebound QoQ in Q1FY22E but may correct in Q2. Reiterate BUY on GAIL and OIL and HOLD on GGL and RIL.
- JKM spot LNG up 116% from Mar'21 low: Severe winter in North Asia led to depletion of gas inventories and surge in Japan Korea Marker (JKM) spot LNG to US$32/mmbtu in Jan'21. European gas storage is at a 3-year low for this time of the year due to diversion of large LNG volumes to Asia in Q1CY21 (high JKM prices), high gas withdrawals due to very cold winter and record high demand in Apr'21 (unseasonably low temperatures) and relatively low pipeline supply from Russia and Norway. Competing with each other for supply to replenish depleted inventories has led to a surge in JKM spot LNG by 116% to US$12.1/mmbtu from US$5.6/mmbtu in early-Mar'21 and TTF European gas price to ~US$10/mmbtu. TTF price rise is also due to surge in EU carbon price, which improved coal to gas switching economics.
- GAIL's FY22-FY23E gas marketing EBITDA outlook good due to surge in oil & spot LNG: Based on YTD prices and futures, Brent is at US$69.1-67.4/bbl in FY22- FY23E vs US$43.5/bbl in FY21 and spot LNG at US$11.3-8.5/mmbtu vs US$5.4/mmbtu in FY21. We estimate GAIL's trading profit on selling Henry Hub (HH) linked US LNG at Brent linked prices and spot prices at US$1.5-3.7/mmbtu in FY22E and US$1.6-1.2/mmbtu in FY23E vs loss of US$0.6-1.1/mmbtu in FY21. At futures, as of 14-Jun'21, GAIL's gas marketing EBITDA works out to Rs39.8-44.0bn (assuming all volumes sold at oil-linked prices) in FY22-FY23E vs loss of Rs3.2bn in FY21. GAIL has indicated that 1) 80% of its FY22E LNG is tied up (some when oil prices were lower) while 20% is deliberately not tied up to gain from strength in spot LNG and 2) 50% of its FY23E LNG is tied up, 30% tied up but positions kept open and 20% not tied. We are estimating marketing EBITDA at Rs27.6-39.2bn in FY22-FY23E. Upside to FY22E EBITDA may be Rs8.9-12.4bn as 20-28% of US LNG may be sold at spot price, though some downside is likely on volumes tied up at lower oil prices. Upside to GAIL's FY22E EPS may be 2-17% and fair value 1-5% from upside in gas marketing, petrochemical and LPG EBITDA.
- GGL's margins to rebound in Q1Y22E but may correct in Q2: We estimate GGL's Q1FY22E EBITDA margin rising to Rs7.5/scm from Rs5.1/scm in Q4FY21 but its Q2 margin may correct based on prevailing oil and spot LNG futures.
- Higher APM & deepwater gas price may boost OIL and RIL's EPS by 1-10% & 2%: We estimate APM gas price at US$3.15-4.7/mmbtu and RIL's deepwater gas price at US$6.8-7.5/mmbtu in H2FY22E and FY23E vs US$2-4/mmbtu in H1FY22.