“Are We Entering the Golden Age of Gas?”
That question was posed in the title of a 2011 special World Energy Outlook report issued by the IEA (International Energy Agency.) In the opening paragraph the authors cited supporting evidence for that bold speculation, among them the North American shale gas boom, the expansion of LNG trade, troubling questions over the future of nuclear power, and growing concerns over global climate change.
This was music to the ears of all Australians pondering the fate of our economy in the face of the a possible slowdown in the mining boomspurred on by the rabid demand for iron ore.
The golden age got off to a troubled start as big name oil players rushed into Australia to develop LNG into a profitable export commodity. Investors eagerly gobbled up stocks of the ASX entries into the fray. Hindsight suggests none of the financial experts responsible for cost projections got it right as project after project suffered from massive cost overruns.
Historically natural gas has been the purview of domestic producers as pipelines are required to get the gas where needed. LNG opened the door to exports as the process involved “liquefying” the natural gas, making it suitable to be shipped anywhere. On arrival the liquefied gas must be converted to a gaseous state for transport via pipeline.
Given the needs for previously non-existent facilities, cost overruns should have come as no surprise. “Feed” gas had to be shipped to newly built liquefication facilities, called trains; transport ships had to be outfitted, and regasification facilities constructed at the receiving end.
Cost overruns were not the only factor grinding the coming of the golden age to a halt. Concerns over the lack of enough “feedstock” gas for the LNG trains became a growing issue. LNG contracts were linked to the price of oil and the shocking collapse of the price of oil in 2014 added to the mounting concerns over the viability of LNG.
The looming presence of new players in the US and Canada added to the wall of worries confronting investors in the ASX LNG operators. Finally, the toxic mix reached its apex as newly operational LNG facilities flooded the market, further depressing the price already troubled by the declines in the price of oil.
LNG, like other commodities, is priced both on a long-term contract basis, and on a “spot price”, defined by Investopedia as:
• The spot price is the current price in the marketplace at which a given asset—such as a security, commodity, or currency—can be bought or sold for immediate delivery.
The following chart compares Asian spot price against JCC (Japanese Crude Cocktail) indexed, or contract, price, through 2018.
Investing in any commodity producer can be attractive to both long-term investors and active traders. If the future demand for the commodity is robust and growing, investors with an appetite for risk and patience to wait should be rewarded. Active traders can take advantage of the momentum swings fueled by global economic conditions affecting wide swings in commodity pricing.
The following table includes the five ASX LNG operators, with both historical and future growth metrics.
LNG is now our third largest export commodity, behind iron ore and coal, but expert opinion on its outlook is mixed at best.
In an example of dueling experts, a 6 August 2018 article appearing in the Sydney Morning Herald first pointed to a Deloitte Investment Monitor report claiming investment in the oil and gas industry has now fallen 59 per cent year on year.
Lack of investment is generally not a sign of conviction regarding future growth. The decline can be attributed to oversupply conditions and falling prices.
Next, the article cited the opinion of oil and gas analyst Saul Kavonic, who said “while planned supply levels are expected to run higher than demand, growing demand from China will outstrip supply in the early 2020s.”
In conclusion, Bloomberg New Energy Finance was forecasting 7.2% demand growth for LNG through calendar year 2018. (In FY 2019 Australian LNG exports climbed to $51 billion dollars, a 21% year over year increase.)
Earlier in the year, an article in the PetroleumEconomist.com pointed to “industry experts” who believe LNG export capacity will have to double from current levels to keep up with demand over the next 15-20 years, propelled largely by countries in the Asia Pacific region moving from coal and diesel to gas in power stations.
Expert opinion can be helpful to investors, but one could make a strong case to rely more on what companies involved are saying. An internet search for LNG outlook shows major global LNG players like BP and Chevron are bullish on LNG.
Another source is company news about adopting LNG as an alternative fuel for their own operations. A 16 July article featured in AustralianMining.com.au reported that BHP Billiton (BHP) is considering LNG-fueled transport carriers for up to 27 million tonnes – 10% — of its iron ore.
Rashpal Bhatti, BHP Vice President, Maritime and Supply Chain Excellence announced a “tender” – think request for bids — open to a “select group of industry leaders, from shipowners, banks and LNG fuel network providers.”
Hydrogen has been touted as a cleaner alternative to LNG here in Australia and elsewhere around the world, but its introduction is still in very early stages of development. LNG is here. Mr. Bhatti explained BHP’s decision to pursue LNG:
• “While LNG may not be the sustainable homogenous fuel of choice for a zero-carbon future, we are not prepared to wait for a 100% compliant solution if we know that, together with our partners, we can make significant progress now.”
Of the four ASX players, the largest – Woodside Petroleum (WPL) and (Santos Limited (STO) both have analyst consensus ratings at HOLD, according to Reuters Finance. Oil Search Limited (OSH) and Origin Energy (ORG) are both rated at OUTPERFORM but long-term investors might see Oil Search’s dividend history as an advantage.
Average annual rates of total shareholder return combine share price appreciation with dividend payments. All the stocks in the table have shown better shareholder returns over the last three years but none match the dividend growth of Oil Search over the long term. Investors willing to hold the stock through the ups and downs in share price over the year benefit.
Oil Search has been plagued by a series of unplanned and planned setbacks. First, the company’s production of both oil and LNG was hurt by a February 2017 earthquake in Papua New Guinea. Second, there is uncertainty over how a new government in PNG will handle gas agreements and Oil Search’s LNG expansion plans. Third, scheduled maintenance reduced the company’s latest production figures.
The company has a 29% interest in the PNG LNG operation run by Exxon-Mobil. The company also has interests in another PNG gas field, where an additional three LNG trains are planned. In addition to its oil operations in PNG the company recently acquired interests in the Alaska North Slope oil fields in the US.
Oil Search is the only stock in the table to grow both revenue and profit in each of the last three fiscal years but is the only one to show negative share price appreciation over the past three years.
Woodside was the first ASX producer to ship LNG, from its Pluto operation in 2012. The company has expansion plans for Pluto, including a feedstock pipeline connecting Pluto with another Woodside LNG facility at the Northwest Shelf, operated by Woodside in a joint venture arrangement with BHP Billiton, Chevron, BP, Shell, and Japan Australia. The Northwest Shelf also produces more than one third of Australia’s oil and natural gas.
Woodside also holds a 13% interest in the Chevron run Wheatstone LNG project, operational and under expansion. The company has numerous exploration interests around the world as well.
Santos Limited has an interest in the PNG LNG operation along with the Gladstone LNG (GLNG) where Santos is the operator and majority stake holder at 30%, along with minority interest partners Total, Petronas, and KOGAS.
GLNG is fed by coal-seam gas supplied by Santos. The company also produces oil and gas in the Cooper Basin and the Carnarvon Basin. The company’s Darwin LNG and its partner Conoco-Philips are halting production awaiting new sources of feed gas.
Santos has been growing revenue for the last three fiscal years, but only returned to profitability in FY 2018, posting NPAT (net profit after tax) of $893 million, reversing an FY 2017 loss of $462 million.
Investors looking for diversification beyond oil and gas might consider Origin Energy, which adds power generation and energy retailing and wholesaling. The company’s LNG asset is the Asia Pacific LNG (APLNG) operation, a joint venture between Conoco-Philips and Origin – each holding 37.5% — and China’s Sinopec holding a 25% interest. APLNG made its first shipment in January of 2016 and its performance is a major reason for Origin’s OUTPERFORM analyst consensus rating.
Investors may be concerned about the impact of the new Default Market Offer scheme for residential and small business customers set by the Australian Energy Regulator that went into effect on 1 July, but some analysts believe the APLNG will make up for the anticipated $110 million-dollar revenue shortfall. The AER defines the DMO as:
• the annual maximum total bill amount (called a reference price) energy companies can charge for the ‘standing offer’ prices based on a set average usage amount. It’s a reference price designed to make it easier for customers to compare energy plans across different providers.