The Aust today
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Policy uncertainty hurting oil and gas juniors
PAUL GARVEY
Uncertainty about government policy is holding back junior oil and gas companies from taking full advantage of the buoyant conditions in the east coast gas market, and is deterring investors from punting fresh capital into the sector.
Fund managers, analysts and executives told
The Australian that equity prices across the local oil and gas space were yet to reflect the strong outlook for east coast gas prices, due in large part to the volatility in policy at both state and federal levels.
But Flinders Asset Management fund manager Andrew Mouchacca said the tight supply and demand fundamentals spelt out in recent reports from regulators were not close to being properly reflected in the share prices of companies in the space.
“From my perspective, it is clear from the commentary in and around the ACCC reporting on demand and supply, together with the recent AEMO report on the Victorian market, that either the market is deluding themselves or they’re not taking much of an interest in the fact that there will be a significant shortfall in the domestic gas market in the medium term,” Mr Mouchacca said.
His fund holds shares in oil and gas stocks including Beach Energy and Cooper Energy due to his belief in the strong outlook for east coast gas prices, but he blames government regulation — such as the gas drilling restrictions and moratoria imposed by the likes of Victoria, the Northern Territory and NSW — for deterring investors from backing the sector more enthusiastically.
“The sector has been hamstrung by bureaucracy,” Mr Mouchacca said.
“When there’re regulatory obstacles in the way of companies, clearly those companies aren’t going to benefit.”
While investors appear to be holding back from pouring into the space, companies are showing their belief in the outlook by launching large-scale takeovers for entrenched players.
Harbour Energy earlier this month made a $13.5 billion bid for Santos after lifting its offer price several times, Mitsui secured AWE for $602m after a three-way bidding war, and Beach Energy’s $1.6bn purchase of Lattice Energy last year preceded a massive share price rerating of the newly enlarged company.
Cooper Energy is one of the junior companies best placed to bring new sources of gas into the east coast, and since November 2016 has raised just under $600m in debt and equity to advance its plans. Yet its shares are down over the past year, something managing director David Maxwell blames on the complexity of the east coast energy market.
“I put investors in two camps. There are those that understand it and have taken positions, and there’s another group — and that’s the bulk of them — that are sitting there trying to work it out,” Mr Maxwell said.
But the fundamental shortage of new supply sources on the horizon on the east coast meant gas prices should remain strong.
“There are lots of options, but under all the different scenarios supply is still tight and prices remain much higher than they used to be,” he said.
“There’s no scenario that we see or hear about that says prices are going back to where they were, and that’s taking people a bit of time to come to grips with.”
Boutique financial services group Taylor Collison recently hosted its second annual east coast energy day, drawing 20 fund managers from Sydney, Melbourne and Hong Kong for a day of briefings from a dozen senior oil and gas executives.
Taylor Collison energy analyst Andrew Williams said investors had become increasingly confident in the outlook for east coast gas prices for the year ahead, but there was still a “significant” disconnect between that outlook and equity prices.
“We don’t get pushback from anyone anywhere on the macro thematic of gas prices rising in a supply-constrained market. Everyone can see it,” Mr Williams said.
“But that’s not necessarily translating to either share price performance or totally opening up the capital floodgates.”
Mr Williams said the ongoing regulatory uncertainty was proving frustrating for corporates and uncomfortable for investors, but the disconnect between gas prices and equity prices would have to turn eventually.
He said many Australian oil and gas companies were trading well below the historical cost of finding and developing their assets, which could help drive further consolidation if share prices don’t start to increase.
“There is still a disconnect between how the market is pricing companies exposed to this theme and what the reality is in terms of the opportunity ahead,” he said.
“I don’t know what the event catalyst is, and it might simply be a number of quarterly reports where we see the look-through on gas prices going up and up and up, but at some point there needs to be a catch-up.”
(20min delay)
