Natural Gas: A Winning Play in a Fossil-Friendly Era?
In the context of President Trump’s shift towards increasing fossil fuel production, natural gas is poised to thrive. India, the fourth-largest importer of natural gas globally, aims to increase its contribution to the energy mix to 15% by 2030, up from 6.45% in 2023. This market analysis provides an overview of the natural gas industry in India, highlighting growth drivers, challenges, and investment opportunities.
Growth Drivers:
- Infrastructure development: Sustained capex (capital expenditure) in building out gas transmission infrastructure will increase penetration and conversion of existing users to natural gas.
- Increasing adoption of compressed natural gas (CNG) vehicles: CNG is growing at a CAGR of 16.3%, while petrol and diesel vehicles growth rates are slower.
- Proposal to bring natural gas under Goods and Services Tax (GST): Simpler tax structure could reduce costs and promote wider adoption.
Pricing Mechanism:
Natural gas prices are linked to the type of field, and industry players are regulated under the administered price mechanism (APM). New oil fields and high-pressure high-tension (HPHT) fields have different pricing structures.
Company Performance:
- City Gas Distribution (CGD): Listed CGD players like Indraprastha Gas (IGL), Mahanagar Gas (MGL), GAIL, and Adani Total Gas (ATGL) have seen their profits drop due to reduced APM gas allocation. However, demand growth from domestic and CNG segments has been strong.
- GAIL: The gas transmission company has seen volume growth and guides for 7% volume growth in the next two fiscal years.
- Petronet LNG: The state-owned entity is responsible for LNG import and regasification. Throughput has been the highest ever, and a brownfield expansion is planned.
- ONGC and Oil India: These state-owned companies are involved in exploration and production (E&P) of crude oil and natural gas. Their revenues are tied to oil and gas prices.
Valuation and Dividend Yield:
- IGL has a dividend yield of 5.2%, making it an attractive play.
- GAIL has a dividend yield of 4%, with a relatively low PE ratio.
- PLNG has a dividend yield of 3.3%, with a planned capacity addition and long-term contracts to source LNG.
- ONGC and Oil India have dividend yields of 5.6% and 3.2%, respectively.
In conclusion, with the rise of fossil fuels, natural gas is likely to thrive in India. Investors can consider plays like IGL, GAIL, and PLNG for their potential in the sector.