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Friday, December 16, 2011

Natural gas industry:-Industry outlook/prospect/competition/high and low prices/beneficiaries/listed stocks/recommendation/psu players/views/potential

Indian companies in the natural gas industry have underperformed the broader market in last three months in spite of healthy quarterly numbers as stagnant domestic gas volumes raise concerns over their future growth. Domestic production of natural gas has been on a steady decline after reaching a peak in the March 2010 quarter. While both the public sector oil majors ? ONGC and Oil India ? have increased their output since then, that raise was unable to compensate for the nearly 27% decline in production from the private sector ? mainly represented by the KG basin production from Reliance Industries' block. ONGC's production of natural gas has been stagnant at the current level for the last decade or so with new wells compensating for the natural decline from ageing fields. On the other hand, Oil India has been steadily growing its gas production, which reached a historical high level of 228 million cubic metres in September 2011.

India's biggest gas importer Petronet LNG has done well to mitigate the shortfall from dwindling domestic production. Its imports in the September 11 quarter were 47% higher at 3,825 million metric standard cubic metres (MMSCM) compared to the March 2010 quarter. In the last one year alone, its volumes jumped 35% as it commissioned expanded capacities. Petronet will see a further substantial jump in its volumes only after its Kochi terminal commences operations in 2013. Till then increase in the imports of LNG, if any, will remain limited.

After reaching a peak of 60 MMSCMD in September 2010 quarter, RIL's natural gas output has declined steadily. According to recent media reports, it has now fallen to 35 MMSCM per day.

We are today seeing a situation where the domestic natural gas availability is gradually going down even as there is little visibility on improvements in the near future. This has impacted the performance of domestic natural gas players over the last three months on the bourses. Companies like Gail, Gujarat State Petronet, Gujarat Gas and Indraprastha Gas have lost between 7% and 14%, while the BSE Sensex lost just 2%. This is in contrast to the group's outperformance in the 12-month period till date.

The natural gas companies have embarked on a capex binge since a couple of years in anticipation of higher gas volumes. With the volume growth not materialising, investors are worried about the utilisation levels of their proposed gas pipelines and return on investment. Regulatory uncertainties pertaining to transportation tariffs have added further to their woes. However, the companies retain their inherent strengths and healthy financials, and long-term investors need not worry too much over these medium term volatilities.

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