OP to Continue Improving
The author is an analyst of KB Securities. She can be reached at hyejung.jung@kbfg.com. -- Ed
1Q21 preliminary OP of KRW764.6bn (-20.3% YoY) falls short of market consensus
— KOGAS announced preliminary 1Q21 revenue of KRW7.7tn (-3.2% YoY, +43.3% QoQ), OP of KRW764.6bn (-20.3% YoY, +193.8% QoQ) and NP (attributable to controlling interests) of KRW513.0bn (-4.5% YoY, +566.6% QoQ). Preliminary OP missed our estimate and the market consensus by 29.8% and 14.5%, respectively.
OP deterioration due to changes in supply cost calculation scheme
— 1Q21 standalone OP contracted 24.6% YoY to KRW710.2bn due to changes in the calculation method for supply costs that are reflected in wholesale prices for power generation-use LNG. Until last year, different LNG supply costs had been reflected based on seasonality (higher during winter December-March; lower in April-November). From this year, costs were set at a fixed amount.
— As a result, annual average power generation-use LNG supply costs rose 39.2% from KRW1.265/MJ in 2020 to KRW1.762/MJ in 2021. However, supply costs applied in 1Q21 earnings declined 18.2% from KRW2.153/MJ in 1Q20 to KRW1.762/MJ, lowering KOGAS’ supply cost losses by KRW204.0bn YoY.
— Meanwhile, consolidated subsidiaries’ 1Q21 OP soared 71.2% (+KRW22.6bn) YoY to KRW54.4bn. OP from the Prelude project in Australia increased KRW61.5bn to KRW36.5bn (vs. operating loss of KRW25.0bn in 1Q20) on resumed production and a surge in international LNG prices. In contrast, OP from the Australia GLNG and Myanmar projects came in at just KRW1.1bn (-96.2% YoY) and KRW8.8bn (-56.2% YoY), respectively, because of lower unit sales prices resulting from soft international oil prices last year.
OP to continue improving in line with international oil prices
— 2021E OP should be in line YoY. Standalone profit hinges on guaranteed returns that are calculated annually. This year, after-tax guaranteed returns are anticipated to improve 0.6% YoY from KRW866.1bn in 2020 to KRW870.9bn. The rate base is expected to decline 2.0% YoY from KRW21.9tn in 2020 to KRW21.5tn in 2021E amid a slowdown in tangible asset investments (i.e., domestic LNG infrastructure) at regulated businesses. However, the guaranteed rate of return is projected to climb from 3.94% in 2020 to 4.04% in 2021E, in line with a higher beta.
— Overseas E&P subsidiaries’ OP is forecast to recover in line with the upturn in international oil prices. Of note, the GLNG project’s OP tracks Dubai crude oil prices with a four-month lag. Accordingly, the recent rebound in international oil prices should bolster the LNG unit’s sales prices through 4Q21. For the Prelude project, we expect a sharp turnaround YoY as output has been normalizing steadily since resuming at end-2020 following production disruptions last year.