Oil and Gas: A plan to have a plan
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 22 September 2020, 9:25 AM
- Sectors Covered:
- Mining, Energy
- The Prime Minister last week announced initiatives aimed at lowering domestic energy prices by participating directly in gas/electricity markets. The little detail or commitments given leaves us with an initial view that this is a plan to have a plan.
- Further detail to be released in the budget in early October.
- We see the oil & gas sector as a Covid-exit trade that has so far been overlooked. Given market jitters around energy, we expect a broad sector re-rating to trail some other key Covid trades. This has left us favouring those oil & gas players with defendable (low risk) earnings platforms and healthy balance sheets.
- The Government is aiming to establish an expanded gas hub at Wallumbilla, by supporting and possibly underwriting new/upgraded pipelines.
- Gas reservation policy also still a possibility.
- We are sceptical as to whether these initiatives can have an impact fast enough to offset a looming 2023 supply deficit.
- This week's news has not caused any changes to our investment views on the sector, with our key O&G sector picks remaining Santos (STO), Woodside Petroleum (WPL), Beach Energy (BPT), Senex (SXY) and (Karoon) KAR, while boosting the value of early gas plays in frontier basins like the Beetaloo.
Government keen to take direct action
The Prime Minister has this week announced the intention of the Federal Government to participate directly in gas and electricity markets in an attempt to suppress long-term gas and energy prices.
A lot of possible initiatives were mentioned although with little actual detail or commitment given, leaving us with an initial impression that this is a plan to have a plan, possibly aimed at triggering more significant talks with key energy players.
We remain cautious, considering it unlikely that any material measures could be made in time to offset an expanding gas supply deficit we see emerging on the east coast from 2023.
Path to market a positive for new sources
Of particular interest in the announcement to us in our gas market coverage were the comments around the potential for the government to underwrite new/expanded gas pipelines, establishing an expanded gas hub at Wallumbilla that resembles the Henry Hub in the US, and its plans to possibly build a 1,000MW gas-fired power station.
The prospect of the government at least partly funding new pipelines linking stranded gas to eastern markets is exciting, but likely to occur over a long time horizon given the considerable complexity from both gas industry and infrastructure provider aspects, as well as typical development times even once plans are cemented.
This leaves us in a wait and see setting on the policy news. We expect more detail to be announced along with the budget in early October.
Still, the prospect of a path to market (critical in the gas game) for new resources in the Beetaloo, Galilee and Bowen Basins is exciting over the long term. Meanwhile the government did not rule out a gas reservation policy, which also remains in focus for us.
Energy looking like the overlooked Covid exit trade
It has been several years since we had this many Add ratings in our oil & gas sector coverage.
Rather than being diehard energy bulls, we have progressively upgraded a growing number of oil and gas stocks in our coverage universe to Add as share prices have declined to what we consider unsustainable levels.
Energy is amongst the most sensitive sectors to a Covid/economic recovery, with gas likely to benefit from improving domestic and global demand (attracting extra gas volumes currently being supplied by the LNG producers back offshore) and oil highly sensitive to a recovery in global transportation.
Calls to action
Our key sector picks remain STO, BPT and WPL amongst the large caps. While amongst small/mid-caps we prefer SXY and KAR. Believing each of these companies can deliver value to investors beyond an oil/gas price recovery.
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