Domestic Gas: Prices weaker but seasonal demand will peak
About the author:
- Author name:
- By Max Vickerson
- Job title:
- Date posted:
- 30 March 2020, 2:40 PM
- Sectors Covered:
- Industrials, New Energy
- Domestic gas markets have seen a fall in prices since November 2019 driven by weaker international LNG spot prices.
- Some domestic producers have limited exposure with fixed price gas contracts.
- Prices are likely to remain subdued in Western Australia as the weak LNG market keeps the demand for backfill gas low.
- We prefer BPT because of its balance sheet strength and COE with its reduced exposure to commodity prices.
- Volatility in international commodity markets will likely continue which will weigh on sentiment towards the sector despite differing exposures.
East Coast gas markets see falling prices since November
Weakness in spot LNG prices caused a flow on effect domestically as LNG producers in QLD sought alternative markets for their uncommitted gas. Spot prices fell across the East Coast and gas stopped flowing towards Queensland in the second quarter. In the March quarter gas flows are in-line with the prior year. Some gas producers have limited their exposure to fluctuating commodity prices though using fixed price gas contracts.
Gas transport constrains QLD flows in winter
The southern gas markets have a highly seasonal demand pattern. Demand peaks at a higher level than local production and interstate gas flows can meet. We think this will limit the impact that low international spot prices will have and that gas coming from storage will be the marginal supplier. Residential heating and electricity demand will be resilient to the impacts of COVID-19 however commercial and Industrial (C&I) demand could suffer.
Western Australia gas will remain subdued
WA’s gas customers remain well supplied as a result of the WA government’s reservation policies. Additional demand from LNG producers is very unlikely given the weak international energy market. We think prices are likely to continue to trade in the range of $4-$5/GJ.
Our preferred picks
Beach Energy (BPT) and Cooper Energy (COE) are the key picks for us amongst the mid/small cap domestic producers. BPT has a strong balance sheet, attractive brownfields growth options and only moderate committed capital spend. Cooper Energy is expecting first gas flows shortly from its Sole project which we expect the market will react positively to. Also, the company’s gas is predominantly sold under fixed price contracts which should limit the impact of commodity price volatility on earnings.
When do you pull the trigger?
Volatility in international commodity markets looks to continue for an extended period. Leverage to commodity prices will vary amongst domestic gas producers however the sector will still probably suffer while energy prices are low. We see value in our key picks but the pain will probably not be over until demand begins to return as restrictions on economic activity are lifted.
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