Shares of city gas distributors surge as spot LNG prices drop

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Shares of city gas distribution (CGD) companies trended higher on March 21 as spot liquefied natural gas (LNG) prices have declined by around 50 percent since December 2022.

CGD players Indraprastha Gas Limited (IGL), Mahanagar Gas Limited (MGL) and Gujarat Gas Limited ended the day with gains of 3.07 percent, 1.45 percent and 1.55 percent respectively.

City gas distributors are dependent on supplies of LNG for their gas distribution requirements and therefore lower prices are beneficial to the companies.

This comes as spot LNG prices have almost halved to $14 per metric million British thermal unit (MMBtu) due to a milder winter and relatively high inventory levels in Europe. This compares to a recent high of $45 per mmBtu.

Weak demand in China, one of the largest consumers of natural gas in the world, due to the strict COVID-19 lockdown has also dragged prices lower. However, experts believe that the trend may reverse with a revival in Chinese demand after the country reopened its borders on January 8.

Benefit to Indian gas players

Brokerage firm CLSA said in a report that CGDs Gujarat Gas, IGL and MGL should see stronger margins in the fourth quarter of the current financial year (FY23) with the recent decline in prices.

“The recent cool-off in spot LNG prices along with the replacement of spot LNG with deepwater gas could lower input costs for IGL and MGL in 4Q and add Rs1.5-2/scm (standard cubic metre) to margins QoQ (quarter-on-quarter). Post a 20% hike in commercial LPG (liquefied petroleum gas) prices, the discount of GGas's industrial PNG (piped natural gas) to LPG has widened to 30% and is also likely to be seen as a relief for the company,” said CLSA.

CGD companies had been affected by high gas prices in the third quarter of FY23. While IGL reported a decline in net profit in Q3, MGL and Gujarat Gas missed on volume expectations in the quarter.

On October 1, the government had hiked natural gas prices by a steep 40 percent to record levels in sync with the high energy rates globally.

Prior to the price hike, CGDs reported profits in Q1 and Q2 of the current financial year.

LNG consumption

Indian LNG consumption rebounded by 3.1 percent in January to 65.5 mmscmd (million standard cubic feet per day) compared to the previous month, according to the CLSA report. A 31 percent month-on-month (MoM) cool-off in spot LNG price may drive a further recovery in February, the report said.

Nitin Tiwari, executive vice president, Yes Securities, said consumers had shifted to fuels other than LNG due to high prices but added that consumers may opt for LNG as prices have been on a downward trend since February.

The CLSA report said that increased LNG consumption “was driven by a rise in LNG demand from refinery (+6.8% MoM/+6.8% YoY), fertilizer (+6.0% MoM/ +32.8% YoY) and industrial (+13.4 MoM/-47.3% YoY)—partly negated by lower city gas (-9.9% MoM/ -71.2 % YoY) and power (-31.4% MoM/-30 % YoY) demand.”