GAIL falls 3%, Credit Suisse underperform on LNG pricing

Another concern that may hurt GAIL's long-term earnings outlook is domestic customers not signing volumes from GAIL's US gas supplies, as it would cost 25-30 percent more than spot LNG.

June 26, 2015 / 15:55 IST

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Shares of GAIL fell 3 percent in early trade on Friday. Credit Suisse has maintained underperform rating on the stock with no change in target price. The brokerage feels that large supply starting end-2015 to pressure on spot LNG pricing and a negative for GAIL earnings per share (EPS). It sees addition of 40 percent to LNG supply from Australia, the US by 2020.

According to Credit Suisse if LT LNG stays expensive compared to spot LNG for a few years, here are few challenges the company may face, “There is a risk of default from customers, notwithstanding take-or-pay, petchem profitability may continue to be weak and trading segment may be impacted, as GAIL tries to pass on some benefits of lower spot to customers.”

Another concern that may hurt GAIL's long-term earnings outlook is domestic customers not signing volumes from GAIL's US gas supplies, as it would cost 25-30 percent more than spot LNG.

“GAIL has spoken of reducing Rasgas LNG offtake by 30-35 percent. The contract allows annual flexibility of 10 percent lower volumes and GAIL is negotiating for better terms. If price or volume commitments are not materially reduced, there is a risk of balance sheet deterioration for GAIL,” it says in report.