There is news that Conoco Philips is under delivering to PGAS, update from Swati
Conoco Philips in South Sumatra is contracted to deliver 350mmscfd this year. Last year it delivered 260mmscfd and early Jan and Feb it delivered anywhere between 350-400mmscfd. Since last three days however there has been a drop in volumes to 300-330mmscfd. We have forecasted 380mmscfd from Conoco Phillips in 2010CL.
Current status?
It looks like Conoco Philips is delivering extra gas to Chevron via PGas transmission pipelines (PGas makes only transmission toll fee on this about US$0.6/mmbtu). This is possibly since the government has asked Chevron to increase oil production and therefore Conoco Philips is diverting more gas to Chevron since Chevron is paying much more for the gas than PGas. PGas is paying US$1.85/mmbtu for the gas.
PGas is currently discussing with the government that if Conoco under-delivers then PGas will cut volumes for its customers. PGas has meanwhile also intimated customers that there will be 20% cut in volumes. This means government will be under pressure to direct Conoco Phillips to divert the gas back from Chevron to PGas. Discussions are ongoing and we will only know in next few days.
In the worst case there could be potentially 5.4% lower distribution volumes (assuming there is no other contracts signed to compensate for these volumes). This could potentially impact earnings by 9-10%.
At this stage we don’t think that there will be no new contracts signed since its only early part of the year. Also government should support PGas here since industries are getting squeezed due to volume shortage.
Conclusion: We think any weakness should be seen as an opportunity to buy as 5.4% lower volumes doesn’t impair the long term structural story. It will only encourage PGas and the government to find more gas reserves as quickly as possible.
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