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LNG spot prices go crazy

19 Oct 2021 7 month(s) ago

The energy market is in chaos and LNG spot prices are soaring. What do analysts say about how this will affect Australian LNG players?

One statistic sums up what is happening in gas prices, a sector in which Australia excels. In 2020 a cargo ship of LNG cost $10 million. Now, it costs $281 million. So with such huge changes, where should investors be looking?

Here is the price history:

UBS has had a go at analysing the implications. Of course, many LNG contracts are long term and are not affected by spot price movements, but the changes are still significant:

“We’ve assessed the extent to which the Australian Energy sector will benefit from record high spot LNG prices. While STO (Santos) has the highest proportion of LNG sales sold at spot markets ... the earnings upside is limited due to production sharing arrangements with Timor Leste. We estimate 10-12% of STO’s total production over 2021-22 will be sold at spot.

“Therefore, we believe WPL (Woodside Petroleum) has the highest earnings exposure to record high spot LNG prices with 12% of WPL’s 2021 total production (and 14% in 2022) forecast to be sold at spot. OSH (Oil Search) and ORG (Origin Energy) (via APLNG) are least exposed given 90-95% of PNG LNG volumes and APLNG volumes are sold under term LNG contracts.”

UBS asks what is driving high spot LNG prices and how long will they last? They conclude that one reason is the economic recovery from the pandemic in Asia is driving strong gas demand (Asia accounts for about 75% of global LNG market consumption).

Another factor is a colder than usual northern hemisphere winter and warmer summer. There has been an energy shortage in China which is feeding expectations that power generators could switch to fuel oil & gasoil.

UBS expects LNG prices to remain elevated leading into northern hemisphere winter but to normalise in late 2022.

“Santos remains our preferred exposure across the Australian Energy sector. It is trading with the lowest P/NPV (0.85 risked) and implied oil price ($56/bbl). We elevate WPL to next preferred due to its exposure to spot LNG prices. Next preferred is Origin with elevated thermal coal prices attracting some risk to FY23+ earnings given Eraring power station’s term coal supply (4Mt) contract expires end FY22. Least preferred is Oil Search with limited organic upside pre-merger completion.”

UBS has buy recommendations on all four stocks. Oil Search’s price target is $5.00 (up 15c); Santos’ $8.65 (unchanged); Woodside’s $26.60 (up $1.10); and Origin’s $5.15 (unchanged).

UBS says it expects the LNG market to remain “tightly balanced as underlying demand is strong as economic activity recovers and new LNG liquefaction capacity has been deferred and in some cases cancelled.” The broker also has a forecast on oil prices:

“We forecast Brent crude will average $67.8/bbl in 2021, rising to $68.5/bbl in 2022 and $60/bbl in 2023-25. Our long-term oil price forecast is unchanged at $70/bbl from 2026 (i.e. ~$60/bbl real $2021) as we forecast an incentive oil price range of $60-80/bbl is required to generate an acceptable return for sufficient new supply to offset reserve depletion and meet new demand.”


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