Gas-fired stocks to charge ahead as demand for cleaner fuels rises: Experts

The growth in availability and consumption of gas would favour transmission companies such as Gujarat State Petronet and GAIL
Completion of new trunk pipelines over the next few years, increased availability of gas in India and from foreign markets, coupled with the government’s focus on cleaner fuels augurs well for gas players, both manufacturers and transporters, say analysts.

Additional domestic gas production in India, according to analysts at Motilal Oswal Securities, is estimated to peak around 40 million metric standard cubic metres per day (mmscmd) by the end of fiscal 2023-24 (FY24) with the commissioning of production wells in the KG Basin.

Reliance Industries (RIL), the report says, is likely to produce around 28 mmscmd of gas (12.5 mmscmd has been auctioned, of which it would use nearly 4.8 mmscmd for its own consumption at the Jamnagar complex), while the rest would come from ONGC. Among sectors, fertilisers, refining /petrochemical (petchem), and city gas distribution (CGD) will be key demand drivers over the next few years.

In the last two months alone, domestic gas production has risen by 6 per cent, or 4.6 mmscmd, to 82.3 mmscmd (January 2021), according to CLSA. Nearly all of this increase has been driven by a 4.4 mmscmd rise in output in the eastern offshore fields to 5.9 mmscmd, primarily led by a rise in output from the RIL-BP field.

The growth in availability and consumption of gas would favour transmission companies such as Gujarat State Petronet and GAIL. That apart, liquefied natural gas (LNG) trucking could potentially create an incremental demand of 8-10 million metric tonnes per annum (mmtpa) over the next decade, analysts say.

India currently has a LNG re-gasification capacity of around 42.5 mmtpa. However, operable capacity is only around 30 mmtpa (of which 90 per cent was utilised in FY20). This operable capacity, as per analyst estimates, is expected to rise by nearly 12 mmtpa due to the removal of constraints at existing LNG terminals. That apart, 24 mmtpa of capacity additions are underway at Dahej and greenfield terminals at Chhara, Jafrabad, Dhamra, and Jaigarh over the next few years. All this should bode well for Petronet LNG.

That said, transportation of this gas to end-users remains an issue, albeit in the short run. Gujarat State Petronet is building three key pipelines – Dahej–Bhadbhut pipeline (to aid higher volumes at Dahej), Anjar–Chotilla / Anjar–Palanpur pipeline (to resolve the bottleneck at Mundra), and connectivity with Charra LNG terminal – which analysts feel should resolve supply issues. Moreover, the Mehsana–Bhatinda pipeline (commissioning by July 2021) would aid the evacuation of gas from key terminals outside of Gujarat.

At the bourses, most oil and gas stocks have done well thus far in 2021. The S&P BSE Oil & Gas index has rallied 6 per cent compared with the 3 per cent rise in the S&P BSE Sensex, year-to-date (YTD). Gujarat Gas and Gujarat State Petronet have been among the top gainers, rallying 35 per cent and 22 per cent, respectively, during this period.

The government’s push for cleaner fuels is another trigger for the gas industry, especially CGD plays. Companies, according to Edelweiss Securities, are planning to add compressed natural gas (CNG) stations at 2-3x earlier run rate. Volume growth, they believe, is poised to accelerate to 13-17 per cent CAGR over the next few years versus 5-14 per cent over the past five years.

“The CGD sector remains our top pick in the oil & gas space with Indraprastha Gas, Gujarat Gas (GGL) and Mahanagar Gas in that pecking order. We maintain a ‘Buy/Sector Outperformer’ rating on them with target price of Rs 701, Rs 618 and Rs 1,480, respectively,” wrote Jal Irani of Edelweiss Securities in a co-authored note with Shubham Mittal.

Among Motilal Oswal Securities’ top picks in gas-related plays are Gail, which has a buy rating and target price of Rs 170; Gujarat State Petronet, which has been given a buy rating and target price of Rs 390, and Petronet LNG, which too has a buy, with a target price of Rs 325.

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