Slugcatcher on the profit-making potential of Oz's east coast gas shortage
THERE are two ways of looking at the Australian east coast gas market, it is either a train wreck happening in slow motion or, as Slugcatcher prefers to see the situation, a marvelous investment opportunity. Slugcatcher on the profit-making potential of Oz's east coast gas shortageThose with east coast exposure stand to profitInsight > Slugcatcher 11 February 2019 CommentsShareSlugcatcherThe train wreck comparison is one preferred by some politicians and oil industry executives annoyed at the way left-leaning governments and anti-development environmentalists have captured the public debate over energy in its many forms. Bans on exploration, bans on fracking technologies and bans on the development of known gasfields have severely crimped the supply of gas and ensured the development of a future shortage. There is, of course, nothing new in any of that, it's just that the process has been so slow moving that some people, especially investors, appear unaware that the future is arriving and a crop of oil and gas stocks with exposure to east coast gas are poised to cash in. An awakening is occurring as the analysis of the situation expands to be less focussed on the damage caused to industry and consumers from the gas shortage to ways in which profits can be earned from inappropriate government policies. Assembling a portfolio of east-coast gas exposed stocks with reserves in the ground could turn out to be the best investment of the next five-to-ten years, especially if a forecast deficit develops in globally-traded LNG. But, before getting to the good news there is an important proviso because anything involving government can be subject to change overnight and with a Federal election due in the next few months the gas market could be in for a dramatic change, especially if shortages and high prices threaten jobs. Having said that it does seem there is a group of oil and gas companies on the cusp of significant share-price re-rating as east coast gas prices rise to match the price of internationally-traded LNG - and possibly exceed it. A glimpse of the LNG-linked future came late last year when some gas consumers were forced to pay 25% more than the equivalent export, or netback, price - a price based on the Japan Korea Marker (JKM) LNG price, less the cost of liquefaction and transport from the Wallumbilla hub in Queensland. A combination of cooler weather in November and a decline in Bass Strait supply saw the local gas price rise to $10 a gigajoule, an around 25% more than the netback price at the time. That situation has corrected but it was a warning shot of what might be ahead for east coast gas customers who once enjoyed much cheaper energy with exposure to the international price a threat to their business model. Over the next few months it is likely that a grim game will be played out as businesses which cannot survive in a high cost environment are pushed to the point of extinction. One of the obvious contenders for closure is the Alcoa-run aluminium smelter at Portland in Victoria which has been kept alive courtesy of a special electricity-supply contract which expires in about two years. In fact, the fate of Portland is probably a hot topic at Alcoa right now because closing a big mineral processing and metal-making facility takes a long time because of the need to manage the workforce and the need to source aluminium from other assets in the Alcoa group. Closures and hardship from gas prices rising to the international threshold which could see Australian east coast customers pay the same as a gas consumer in Japan or Korea is one side of the situation, identifying the winners on the other side of the equation is what interests The Slug. The most obvious winners from the prospect of much higher gas prices in Sydney and Melbourne, Australia's two biggest cities, are companies with proven gas reserves and access to the gas market. Seven companies listed on the Australian stock exchange are seen by Bell Potter, a stockbroking firm, complying with the winning formula - Santos, Beach, Senex, Cooper, Comet Ridge, Central Petroleum and Blue Energy. "These companies have production delivering into domestic gas markets and/or the LNG facilities in Gladstone, or have projects which have this potential," Bell Potter said. Interestingly, the broker produced its report into east coast gas suppliers despite only researching one of them, Blue Energy, which is rated a speculative buy, leaving open the potential to broaden its analysis as the business opportunity grows - which it will. The reason a lot more interest can be expected from the financial community in the east coast gas market is that the global LNG market is likely to tighten, and that's the key to the next upward move in local gas prices. "LNG producers generally expect a supply deficit from the early 2020s," Bell Potter said. "Strong growth in global LNG demand is typically met by more staggered growth in supply given the significant barriers to bring large-scale LNG production online. "This LNG supply deficit, together with longer-term risks to Australian domestic supply, should see sustained higher gas prices on the east coast." Two final points. Not only is it hard to fault the evidence pointing to an east coast gas crisis, but it is equally hard to fault the potential for fat profits from a portfolio of gas producers exposed to a market poised for a price explosion.
COI Price at posting:
35.5¢ Sentiment: Buy Disclosure: Held
(20min delay)
