A sharp oil price decline has weakened GAIL’s earning outlook; now, a prolonged lockdown to fight COVID-19 has weakened the demand outlook as well. We expect India’s gas consumption to decline ~25% in Q1FY21F and 11% in FY21F. But we think there will be a longer-term impact, as demand may not recover fully in several segments and the new fertiliser/city gas projects will likely get delayed. Our gas demand forecasts decline by 19% for FY21F and 11-14% for FY22-25F vs our earlier forecasts.
Outlook very weak; marketing worries us the most with likely loss in FY21/22F
A sharp demand decline is worrisome for GAIL, as it has a large portfolio of LNG import contracts, particularly Henry Hub (HH) linked contracts. With weak demand, and new domestic gas from KG-basin, LNG imports outlook has become bleaker. We believe GAIL will need to dispose of HH volumes at low spot LNG prices and incur losses. There could also be losses in FY21F from oil price-linked HH sales. To reduce prices, India is further renegotiating oil linked contracts with Qatar. Ironically, a lower oil-linked LNG price will hurt GAIL, as it will raise the break-even for its oil-linked HH sales.
