UTILITIES (NEUTRAL) Sector News Flash: Gas Price Conundrum

THE BUZZ

The Energy Commission (ST), Petronas and the Economic Planning Unit (EPU) are discussing the final recommendation to the Cabinet  on the price of gas. Sources told StarBiz that meetings were  being  held almost every week to look into  the quantum to borne by TNB, the independent power producers (IPPs) and finally, the end-consumers. Analysts said TNB and the IPPs, which had earlier asked for bigger margins, would have to consider sacrificing some margins to ensure that the final cost of electricity was under control. (StarBiz)

OUR TAKE

Alarm bells ringing. We view this article in StarBiz with some cause for concern for the profitability of Utility-related companies in Malaysia. Previously, any gas price hike hasbeen accompanied by a corresponding hike in electricity prices to compensate for the higher fuel costs. Do note that in Malaysia currently, all fuel costs are borne by TNB and it would only be able to maintain its profit margins by passing on any fuel cost increases to consumers via higher electricity prices. Going forward, the main issue is how to price the natural gas that is pumped into the system from Malaysia’s 1^st Liquefied Natural Gas (LNG) importation terminal in Melaka that should operate commercially by Sep 2012.

Market price for LNG? Previously, the various major stakeholders in the importation of LNG into Malaysia seemed to have held somewhat intransigent positions, with Petronas insisting that it will sell the gas generated from the LNG at market prices, TNB insisting that is should be able to pass on this market price of gas via a higher electricity tariff and the Government seemingly unwilling to raise the price of electricity. While we are uncertain at what price the LNG has been sourced and from where (2 previous possible sources include Bintulu and Gaz de France’s trains in Egypt), the indicative natural gas price in Asean is at RM40 per mmBTU versus the current RM13.70 per mmBTU enjoyed by the power sector. As such, someone will have to pay for the 3-fold jump in gas prices.

Even if only 200mmscfd of gas is generated from LNG at market prices versus the 1350mmscfd of gas that should be supplied to TNB from Petronas,  which would still mean that the blended price of gas should be RM17.60 per mmBTU or a 28.5% hike in gas prices that has to be absorbed either by TNB, IPPs or consumers. 

More transparency from authorities. Aside from this rather alarming article, positive catalysts for the sector include greater transparency on industry drivers from the authorities. The ST is now releasing information on the generation mix for electricity on a daily basis on its website. (See Figures 1 and 2). We also note the upcoming launch of the Malaysian Energy Information Hub by the Ministry of Energy, Green Technology and Water on 28 Feb, which we hope will also shed more light on industry dynamics on a more periodic basis.

BUT much uncertainty remains. Our analysis currently indicates that a 1% hike in overall natural gas price without a corresponding hike in electricity tariffs would lower net profits by 3%. As such, a clear policy as to how much LNG-related gas will be sold at and who will share the cost needs to be articulated soon to avoid concerns of undue profit erosion at the  Utility companies. Do note that requiring Utilities to absorb this cost would be akin to continuing the subsidy mentality that the Malaysian Government has previously indicated the country should wean itself off. In terms of our calls for the Utility sector, we remain NEUTRAL on TNB (FV: RM6.36) and see the gas price uncertainty as another factor capping its upside. We have a Trading BUY call on MMC (FV: RM3.70) but that is largely driven by non-power catalysts, while we keep our  BUY call on Petronas Gas (FV: RM17.00) for now, although this will likely be reviewed given the limited upside to our FV. Do note that PetGas is a beneficiary of the LNG terminal regardless of the gas price as they are only transporters of the gas rather than  the  owners. All in all, we remain NEUTRAL on the sector and on the largest component of the sector, namely TNB, until the date for the general election is announced, after which greater clarity can be expected on any electricity tariff and gas price hikes.  


Source: OSK188