The World’s Biggest LNG Operator
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
For KOGAS’s Australian GLNG project, W1.6tn of impairment losses have been recognized over the past five years. With investment for the project now decreasing, the project’s BEP oil price has fallen to US$50/bbl (WTI basis). If the WTI price rises by US$1/bbl, annual project OP should increase by about W4.0~5.0bn. Assuming a WTI price of US$65/bbl, the figure should exceed W50.0bn. Even at a WTI price of US$60/bbl, the possibility of impairment losses from E&P projects is low. In addition, the firm’s new hydrogen distribution business also looks promising.
Large-scale past impairment losses now bringing down BEP
Adhering to a Buy rating, we raise our TP on KOGAS from W40,000 to W50,000 to reflect: 1) the removal of a discount (W670.0bn) from our calculations related to possible impairment losses for several projects; and 2) a likely rise in pre-tax guaranteed return for 2022 due to an expected 2H21 interest rate hike. As our TP reflects only the firm’s Korea-based LNG wholesale business, when oil prices rise, the value of overseas E&P and new businesses related to hydrogen distribution should be highlighted as well. Amid oil price expansion, KOGAS remains as the only stock to have escaped share price improvement, trading at a P/B of 0.4x based on 1Q21 earnings.
KOGAS’s Australian GLNG project, which has long been a weakness due to large-scale impairment losses over the past five years, has now emerged as a so-called blue-chip asset with a BEP oil price of less than US$50/bbl (WTI basis). Due to the nature of the E&P business, which mostly sees fixed costs, oil prices above BEP should result in the recording of profits. Based on a WTI of US$65/bbl, annual project OP is estimated at over W50.0bn. For reference, the sensitivity of the Australian GLNG project’s annual OP to a WTI price change of US$1/bbl is about W4.0~5.0bn. Nevertheless, some profit increase is to be offset by third-party gas purchase (variable cost).
Core of hydrogen business is ability to handle large-scale LNG projects
According to media reports, after being selected as a hydrogen distribution agency, KOGAS plans to build a large-scale hydrogen production site, fuel cell power generation complex and hydrogen charging station (Korea), and a renewable energy power plant complex and water electrolysis facilities (overseas). The core strength of the company’s hydrogen distribution business is its ability to handle large-scale LNG projects. KOGAS is a market-type public company and the world’s biggest LNG operator. We note that LNG business is largely inaccessible to other domestic companies due to KOGAS’s possession of huge portions of relevant land, capital, and technology, as well as significant purchasing power. Of course, as the government aims to lower the unit distribution price of hydrogen, there are potential issues regarding profitability, but when economies of scale arise, these concerns should be resolved naturally. While its share price looks to not yet reflect related expectations, we believe that KOGAS will enjoy valuation re-rating in the near future.