LNG exports, the pros and the cons

Resources Corner

In the midst of reporting season there’s been a raft of positive results for energy stocks with LNG players showing the potential of the sector.
 
Beach Energy Limited has posted a 20 per cent jump in production over the 2014 financial year, but lowered its output guidance for the year ahead. Drillsearch Energy Limited delivered record output and revenue over the 2014 financial year and flagged growth ahead. While Petsec Energy Limited saw a 19 per cent drop in net oil and gas revenues from the June quarter. 
 
Liquefied Natural Gas Limited has struck a deal to buy the Bear Head LNG Project in Nova Scotia in Canada for $US11 million and raised $38.6 million through a share placement to fund the acquisition. Pengana Global Resources Fund Portfolio Manager, Tim Schroeders is positive about the potential for LNG’s growth despite the fund’s having sold their whole position in the company. 
 
Economic news
 
As the drive towards exporting LNG continues it’s becoming clear that exposure to higher Asian energy prices will have both benefits and drawbacks. Exporters will revel in the boosted margins but local energy users will see their bills grow dramatically. The situation has pushed a group of manufacturing industry associations to commission a report by Deloitte Access Economics (Gas Market Transformations – Economic Consequences for the manufacturing sector) investigating the economic costs of increasing energy exports. 
 
“Changes taking place in the East and West Coast gas markets will bring forth both positive and negative impacts. While the gas and construction sectors are expected to benefit from the development of a new East Coast LNG industry, almost all other sectors within Australia’s economy are likely to experience loses in income. Greater input costs associated with higher gas prices and greater risk arising from a more difficult gas contracting environment will have adverse consequences for many regions and states.”
 
The report comes as US Congress contemplates opening up its shale gas reserves to Europe. Media reports suggest that lobbyists opposed to the move are citing the Australian example as evidence of how increased trade can reduce the competitive advantage that local industry has when energy is reserved for domestic use.
 
Commentary
 
This week Finance News Network spoke to the Pengana Global Resources Fund Portfolio Manager, Tim Schroeders about the fund’s holding and outlook.
 
Which stocks have supported your performance over the last quarter, and what’s most attractive about those companies?
 
“Performance has been pretty good; we did about 4.2 per cent for the quarter. Oil Search Limited (ASX:OSH) was one of our bigger positions, which did around 14 per cent return for the quarter. The main fill up there was its successfully bringing its PNG LNG project into production on time and on budget. And that changes the cash flow dynamic for this company dramatically from absorbing a lot of capital over the last few years, to generating very strong production and cash flow growth. So that’s been pleasing.
 
Also, a smaller company that we had really good success with over the last quarter was Liquefied Natural Gas Limited (ASX:LNG), which the share price was up threefold in the space of a quarter. And interestingly enough, it’s been an area of the market in terms of a smaller cap resource companies that have been unloved. But selectively we’re seeing very good opportunities, and LNG was one of them in the past quarter.”
 
You’ve mentioned Oil Search Limited and Liquefied Natural Gas Limited. How long will you continue to hold on to these positions?
 
“Liquefied Natural Gas Limited, LNG, we actually liquidated our whole position during the last quarter, despite the price rise. And the company still remains very well positioned to grow its share price and ultimately, develop into a cash generative business. But we’ve seen this company grow from a market capitalisation of less than $100 million, when we got first invested in the company, to a market cap now in excess of a billion dollars. We’ve just taken our money off the table, continue to reassess the situation and won’t be surprised if we come back in at a later stage. Oil Search Limited, we’re long term happy holders at this stage. We continue to see good upside for the company and it’s just on the cusp of going through a strong cash generative phase.”
 
Doing deals
 
Liquefied Natural Gas Limited (ASX:LNG) has struck a deal to buy the Bear Head LNG Project in Nova Scotia in Canada for $US11 million. The liquefied natural gas developer will buy the 255 acre site from a subsidiary of Anadarko Petroleum Corporation.
 
Liquefied Natural Gas Limited (ASX:LNG) has raised $38.6 million through a significantly oversubscribed share placement to fund its Bear Head LNG Project acquisition. The liquefied natural gas developer placed about 14.9 million shares at $2.60 cents per share to existing US and Australasian institutional investors.
 
AGL Energy Limited (ASX:AGK) has taken a step closer to securing New South Wales power producer Macquarie Generation after Australia’s competition regulator said it will not block the deal.
 
Production reports
 
Beach Energy Limited (ASX:BPT) has posted a 20 per cent jump in production over the 2014 financial year, but lowered its output guidance for the year ahead. The oil and gas producer delivered a record result of 9.6 million barrels of oil equivalent (mmboe) over the 12 months to the end of June.
 
Drillsearch Energy Limited (ASX:DLS) has delivered record output and revenue over the 2014 financial year and flagged growth ahead. The oil and gas explorer exceeded guidance to produce a record 3.4 mmboe in the year to the end of June. Sales revenue more than tripled over the year to a record $387 million and the company also booked capital expenditure below its last forecast range.
 
Petsec Energy Limited (ASX:PSA) has announced and 19 per cent drop in net oil and gas revenues from the June quarter. Compared to the previous quarter, lower production and sales prices meant net earnings after exploration expenses slipped to $1.49 million from $2.13 million.
 
Growth and diversification
 
Paladin Energy Limited (ASX:PDN) made some solid gains after announcing key developments at its flagship Langer Heinrich uranium mining operation in Namibia. The uranium miner has now settled the $US190 million sale of a 25 per cent joint venture equity stake in the project to a Chinese nuclear utility.
 
Shares in Silex Systems Limited (ASX:SLX) plunged almost 40 per cent after the technology firm provided an update on its SILEX Uranium Enrichment Technology licensing agreement. The company says its licensee for the technology, Global Laser Enrichment, has announced changes to the funding and pace of the commercialisation program.