The Office of the Chief Economist at the Australian Government’s Department of Industry, Innovation, and Science publishes a quarterly report forecasting “the value, volume and price of Australia’s major resources and energy commodity exports.” Two- year forecasts come out in the June, September, and December reports with a five-year forecast included in the March report.
The recently released March report includes projections that should pique the interest of retail investors sitting on the fence considering investing in ASX oil and gas stocks.
To the surprise of the reports creators, the rally in commodity prices remains in place, leading to their forecast for the total value of Australia’s resource and energy exports in FY 2018 to climb to the highest level ever recorded – $230 billion.
Australian investors who jumped on the coming “golden age of gas” driven by LNG (liquefied natural gas) exports watched in disappointment while cost overruns at LNG projects and lower prices due to linkage with declining oil prices weighed down the sector.
The report projects the total LNG export volume for FY 2017 of $23 billion will increase 69.5% to $39 billion by FY 2023. The increase will be driven by both higher export volumes and higher prices, with LNG exports expected to bump metallurgical coal from the number two spot as our second largest export. Oil exports over the same period are forecasted to increase from $5.6 billion to $9.3 billion, a 66% jump.
The rosy outlook is short to medium term, with forecasters expecting export earnings to decline slightly by FY 2020, “levelling out at about $212 billion to $216 billion from 2019-20 onwards.”
These forecasts suggest a short-to medium term opportunity in the big name ASX oil and gas producers with substantial LNG operations. However, the fact remains the price of LNG is linked to the price of oil, fraying the nerves of risk-averse investors. Oil bulls point to the early 2017 forecasts calling for $60 Brent Crude. As of 26 March, of this year the price was $74.50 with some macro-economic factors suggesting further increases and others suggesting declines.
Agreements to limit production carved out by Saudi Arabia are credited for some of the price rises, along with robust global growth. The Saudis and the Russians are making noises about further production cuts to drive the price of oil to $80 and more. US president Donald Trump has entered the picture, complaining of what some could say amounts to price-fixing on the part of the Saudis and the Russians.
Supply reductions are further at risk from what some analysts and experts are dubbing the “Mideast risk premium” spurred by tensions between Saudi Arabia and Iran as well as the potential withdrawal by the US from the Iran nuclear deal and the imposition of new sanctions. Contract pricing for LNG exports is complex at best, with graduated rises and declines linked to the price of oil to protect both buyers and sellers. Currently Asian buyers are looking for more favorable terms, but the fact remains LNG producers have some protection against the unlikely eventuality of a collapse of oil prices.
The ASX boast four major oil and gas producers with substantial presence in the LNG sector.
Woodside Petroleum (WPL) is our largest oil and gas producer, more than twice the size of pure play rivals Santos Limited (STO) and Oil Search Limited (OSH). The company was at the forefront of the beginnings of the hoped-for LNG boom, with enthusiastic investors soon suffering due to production delays and cost overruns. While share price appreciation has been minimal over the last five years, investors have enjoyed 26% growth in dividend payments.
The share price was benefiting from rising oil prices when investors were yet again disappointed with the company’s Full Year 2017 Financial Results. The profit increase of 18% was not enough to shield the stock price from declining production (-11%) and revenue (-3.49%.)
Despite its massive size the company is in hot pursuit of growth opportunities. Woodside’s Browse LNG project was an early casualty of the fall from grace of the LNG boom, but it now appears back on the company’s front burner. In addition, the company recently acquired controlling interest in the Scarborough gas field from Exxon Mobil.
Analysts expressed concern over the cost of the project, to be funded by a capital raise, but Woodside management defended the acquisition as a source of supply for its Pluto LNG operation. Management anticipates rising LNG demand from China necessitating increased supply. Woodside also has expansion plans for its West Africa operations.
Woodside’s LNG dominance and stable dividends make the company a somewhat safe if not spectacular play. However, should the price of oil explode in the face of Mideast tensions, investors could be well rewarded.
Origin Energy (ORG) is the only diversified play, adding power generation; energy retailing, and renewable energy to its oil and gas production and exploration business. The company holds a 37.5% stake investment in the Australia Pacific LNG (APLNG).
Every company involved in construction of LNG operations incurred heavy debt loads, with Origin being no exception. To reduce its debt the company sold its Lattice Energy oil and gas assets to Beach Energy (BPT) for $1.25 billion dollars back in September. Origin retained contractual agreements for gas supplies from Lattice.
Investors applauded the move and the lagging stock price began to rise until the release of the company’s Half Year 2018 Financial Results on 15 February.
Origin reported a statutory profit loss of $207 million, due to a one-off impairment charge. However, this was an improvement over the previous half year period of a $1.5 billion-dollar loss. Investors were not impressed, but the share price has regained momentum since the report.
The company’s energy business is its top performer, reporting a 21% increase in EBITDA (earnings before interest, taxes, depreciation, and amortisation) from $735 million to $891 million. The Integrated Gas operations rose 120% from $287 million to $630 million, with management citing strong results from the LNG operations.
By the close of 2018 Origin expects to supply four LNG cargoes a year – 250,000 tonnes – to Chinese firm ENN.
Santos Limited (STO) rushed head long into the LNG euphoria with its own GLNG project and a minority stake (13%) in the Papua New Guinea Project LNG Project. Begun amidst great fanfare in 2011, Santos was forced to take two asset write downs in 2016 following the collapse of oil prices – $565 million in February followed by $1.5 billion in August.
Management embarked on a turnaround strategy which began to show signs of life by the release of Full Year 2016 Financial Results, announced in February of 2017. While the company posted a staggering $1.04 billion-dollar loss due to one-off charges, an underlying profit of $63 million and a 6% revenue increase was enough to convince some investors to put the stock on a watch list. By mid-July the stock price began to rise
Skeptical investors awaiting additional evidence of the validity of the turnaround got it in November of 2017 when Santos announced it had received a takeover bid from US based Harbour Energy back in August, a bid the company rejected. The initial offer of $4.55 per share was followed by another bid of $5.30 per share at the time Santos disclosed the takeover interest. The trading range of the Santos share price during that period was $3.34 to $4.39.
Harbour Energy is an arm of US private equity firm EIG Global Energy Partners with a focus on acquiring oil and gas assets outside the US. Reportedly the company is casting a covetous eye on LNG assets. In early April Harbour came back with another offer, this time offering AUD$6.13 per share with a $0.37 dividend sweetener, lifting the offer to AUD$6.50.
The odds against completing the deal are long at best, as Santos sold 15% of its stock to Chinese investors ENN Group and Hony Capital; not to mention needed approval from the Australian government. Nevertheless, the offer in and of itself is a sign of interest in LNG operations in general and Santos in particular.
Oil Search Limited (OSH) survived the twin disasters of the GFC and the unexpected crash of oil prices in late 2014 better than any of its competitors. Over the past decade the stock price is still up 60%.
Oil Search by its own admission has an asset portfolio dominated by gas. In the eyes of some market commentators the company is very close to a pure play LNG producer. Yet it is hard to argue with success, and the Full Year 2017 Financial Results were outstanding. Higher prices helped drive a 17% increase in revenue with reduced operating expenses contributing to a 236% profit increase.
The company made a major acquisition in 2017 to augment its asset base with its $400 million purchase of three exploration blocks in a newly discovered prospective oil find in the US state of Alaska. Reported to be the largest onshore oil find in the last thirty years, the Horseshoe site on Alaska’s North Slope is said to hold 1.2 billion barrels of oil. Oil Search acquired a 26% interest in the Nanushuk play, co-owned by Spain’s Repsol SA (REP.MC) where the Horseshoe block is situated.
Oil Search has contracted with US based oilfield services giant Halliburton Company before taking operational control in June of 2018. Oil Search has an option to double its holdings for an additional $450 million. The company is also expanding its LNG operations in Papua New Guinea.
Long time investors in the oil and gas price recall few analysts, if any, predicted the dramatic drop in oil prices for Brent Crude in 2014, dropping from over $100 per barrel in June to $62 by year end. The price of oil now is beating analyst expectations, but one major firm, Barclays, is predicting a drop to $60 by 2019, largely due to increased production from the US. The International Energy Agency (IEA) is already predicting the US production of more than 10 million barrels per day will eclipse oil output from Saudi Arabia this year, leaving the US trailing only Russia.