UTILITIES (NEUTRAL) Sector News Flash: Gas Price Conundrum

Stock Name: TENAGA
Company Name: TENAGA NASIONAL BHD

Research House: OSK

Price Call: HOLD

Target Price: 6.36

Stock Name: MMCCORP
Company Name: MMC CORPORATION BHD

Research House: OSK

Price Call: BUY

Target Price: 3.70

Stock Name: PETGAS
Company Name: PETRONAS GAS BHD

Research House: OSK

Price Call: BUY

Target Price: 17.00

THE BUZZ

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

OUR TAKE

Alarm bells ringing.We view this article in StarBiz with some cause for concern for the profitabilityof Utility-related companies in Malaysia. Previously, any gas price hike hasbeenaccompanied by a corresponding hike in electricity prices to compensate for thehigher fuel costs. Do note that in Malaysia currently, all fuel costs are borneby TNB and it would only be able to maintain its profit margins by passing onany fuel cost increases to consumers via higher electricity prices. Goingforward, the main issue is how to price the natural gas that is pumped into thesystem from Malaysia's 1^st Liquefied Natural Gas (LNG) importationterminal in Melaka that should operate commercially by Sep 2012.

Market price for LNG?Previously, the various major stakeholders in the importation of LNG intoMalaysia seemed to have held somewhat intransigent positions, with Petronas insistingthat it will sell the gas generated from the LNG at market prices, TNBinsisting that is should be able to pass on this market price of gas via ahigher electricity tariff and the Government seemingly unwilling to raise theprice of electricity. While we are uncertain at what price the LNG has beensourced and from where (2 previous possible sources include Bintulu and Gaz deFrance's trains in Egypt), the indicative natural gas price in Asean is at RM40per mmBTU versus the current RM13.70 per mmBTU enjoyed by the power sector. Assuch, someone will have to pay for the 3-fold jump in gas prices.

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

More transparency fromauthorities. Aside from this rather alarming article, positive catalystsfor 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 dailybasis on its website. (See Figures 1 and 2). We also note the upcoming launchof the Malaysian Energy Information Hub by the Ministry of Energy, GreenTechnology and Water on 28 Feb, which we hope will also shed more light onindustry dynamics on a more periodic basis.

BUT much uncertaintyremains. Our analysis currently indicates that a 1% hike in overall naturalgas price without a corresponding hike in electricity tariffs would lower netprofits by 3%. As such, a clear policy as to how much LNG-related gas will besold at and who will share the cost needs to be articulated soon to avoid concernsof undue profit erosion at the  Utilitycompanies. Do note that requiring Utilities to absorb this cost would be akinto continuing the subsidy mentality that the Malaysian Government haspreviously indicated the country should wean itself off. In terms of our callsfor the Utility sector, we remain NEUTRALon TNB (FV: RM6.36) and see the gas price uncertainty as another factorcapping its upside. We have a Trading BUYcall 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. Donote that PetGas is a beneficiary of the LNG terminal regardless of the gasprice as they are only transporters of the gas rather than  the owners. All in all, we remain NEUTRAL on the sector and on the largestcomponent of the sector, namely TNB, until the date for the general election isannounced, after which greater clarity can be expected on any electricitytariff and gas price hikes.  


Source: OSK188