GAIL struggles to profit from sale of gas in domestic market

GAIL (India) Ltd. is struggling to earn adequate profits in the domestic market owing to the fall in liquefied natural gas prices.

The company operates such that it purchases Liquefied Natural Gas (LNG) at contracted prices in the international market. It then sells the same at prevalent rates in the domestic market. This activity is responsible for generating nearly 70 to 75 per cent of its revenue. However, the dip in selling prices and a surge in buying prices is a legitimate cause of concern for the company.

The Singapore LNG prices are the benchmark LNG prices for Asia. They have declined over 60 per cent and have plummeted to as low as US$ 4.2 per million British thermal unit over the course of the last 6 months. This is due to the supply glut and high inventory in North Asia.

GAIL has three long-term LNG contracts to purchase gas, two of which are with the US while the final one is with Russia. The landed cost of US LNG contributes over 69 per cent of its import volumes in India. Presently, it is at a 25 per cent premium to the Singapore spot price.

The Henry Hub prices are the benchmark in the US. The contracted price of GAIL is 115 per cent of the Henry Hub prices. Fixed fees amount to US$ 3 per million metric British thermal unit, while transportation charges amount to US$ 1.5-2 per million metric British thermal unit.

GAIL can always mitigate this risk by hedging, swapping or selling these contracts. The subdued spot market could very likely engender losses for unhedged contracts and exert pressure on the company’s trading profits.

The business of natural gas trading has been the largest contributor in terms of GAIL’s revenue; its contribution to operating income, however, has fluctuated over the past year based on the fluctuations in prices.

On Thursday, the shares of GAIL (India) Ltd. opened at Rs. 353.25, and hit a high and low of Rs. 354.90 and Rs. 347.00. At 12:17 pm, the stock was trading at Rs. 347.95, down 1.47 per cent.