Gas industry is growing, but so is competition

Resources Corner

The Australian LNG industry is growing rapidly as it chases strong demand from Asia. Tim Schroeders warns that Australian companies must not be complacent about competition from other gas producing countries.
 
With big investments in export facilities there is a growing debate about whether this threatens to over-supply the market and depress prices to a point that will undermine the economics of so much infrastructure. The IEA helped to answer that question this week with a report that is in no doubt about the strength of demand from China for the decade ahead.
 
In company news, mergers and acquisition activity is still strong with Envestra’s independent directors backing the cash offer of $1.32 from the Cheung Kong consortium. Drillsearch Energy has competition in its takeover of Ambassador Oil & Gas in the form of US corporation Magnum Hunter Resources and Karoon Gas has discharged its 40 per cent interest in Browse Basin exploration permits to Origin Energy for up to $860 million.
 
Economic News
 
The International Energy Agency has forecast rapid growth in demand for natural gas with China’s demand set to double by 2019. The IEA is a Paris based watchdog of international energy industries. Its medium-term gas market report says LNG would fill a large part of this demand suggesting that half of all new LNG exports will come from Australia.
 
"While demand growth is driven by the Asia-Pacific region – and especially China – supply growth for the international gas trade is dominated by private investments in LNG in Australia and North America." Explained Maria van der Hoeven, the IEA Executive Director.
 
Local commentary
 
To try and get a handle on LNG price fluctuations Finance News Network spoke with Portfolio Manager of Pengana Global Resources Fund, Tim Schroeders.
 
“Exports are the growth area for LNG but that’s not the question, the question now really is; what are the sustainable prices in that market longer term; particularly as countries such as the US start to implement LNG and export strategies.”
 
What is the competitive landscape for Australian companies?
 
“Five years ago it was probably conventional wisdom that Australia was very well placed given its gas reserves to feed Asia’s growing LNG demand. But increasingly Australia’s going to attract competition from other parts of the world, whether it be Russia and their big deal with China, gas production out of the US has grown exponentially and existing players who continue to grow strongly such as Qatar are also going to be competitive.”
 
“Gas demand will continue to grow strongly out of the Asian region but factoring in too higher prices and anticipating that demand is going to outstrip supply is a little bit premature in this environment.”
 
Will new export facilities push up Australian domestic prices rise in line with higher export prices? 
 
“I think what we’re seeing is a globalisation of gas and gas pricing, but it has happened at a much faster pace than we had previously anticipated. Particularly given the growing shale phenomenon out of the US, that’s really been a game changer, not just in the US but for global oil and gas.”
 
Growth in gas
 
Oil Search Limited (ASX:OSH) helped boost the energy sector to the top performer over the month of May. The sector rose 3 per cent over the month also aided by stronger oil prices and a significant gas agreement between Russia and China. Oil Search jumped more than 6 per cent over May after welcoming the first shipment of liquefied natural gas from the $US19 billion PNG LNG project in Papua New Guinea. Energy majors Origin Energy Limited (ASX:ORG), Santos Limited (ASX:STO) and Woodside Petroleum Limited (ASX:WPL) also gained ground over the month.
 
Battle for acquisitions
 
Oil and gas explorer Drillsearch Energy Limited (ASX:DLS) has some hot competition in its friendly takeover of Ambassador Oil & Gas Limited (ASX:AQO) in the form of US corporation Magnum Hunter Resources. The NYSE traded Magnum Hunter announced an off-market takeover offer of one Magnum Hunter share for every 28 Ambassador shares. The Magnum Hunter offer represents a 20 per cent premium to the Drillsearch offer. Drillsearch had offered 1 of its shares for every 5.4 Ambassador shares valuing the target at 29 cents per share.
 
Paladin Energy Limited (ASX:PDN) cleared a hurdle to sell a 25 per cent joint-venture equity stake in its Langer Heinrich Mine. The uranium miner inked a $US190 million deal in January to sell the interest in the asset to a Chinese nuclear utility. Though the sale still remains conditional upon approval by Chinese Government authorities.
 
Envestra Limited’s (ASX:ENV) independent directors have backed the cash offer of $1.32 from the Cheung Kong consortium. The natural gas distribution company received the offer at the beginning of this month that valued the company at $2.37 billion.
 
Origin Energy Limited (ASX:ORG) has flagged a $1 billion equity raising to partially fund its purchase of natural gas resources in the Browse Basin, off the north-west of Western Australia. The energy company has inked a deal with Karoon Gas Australia Limited (ASX:KAR) to buy its entire 40 per cent stake in two exploration permits for up to $860 million. US oil company ConocoPhillips is the operator with a 40 per cent interest while the remaining 20 per cent stake is held by PetroChina Co.
 
Karoon Gas Australia Limited (ASX:KAR) has discharged its 40 per cent interest in Browse Basin exploration permits to Origin Energy (ASX:ORG) for up to $860 million dollars. The deal is comprises of a $600 million payment up front and further payments as the resource is developed and achieves production. The cash injection will allow Karoon Gas to develop promising oil discoveries in South America. The share price has plunged recently ahead of a trading halt while to company worked to shore up its finances.
 
Community unrest
 
Shares in Metgasco Limited (ASX:MEL) rose after informing the market the Independent Commission Against Corruption (ICAC) will not be proceeding with an inquiry into the company. The coal seam gas miner has faced turbulence with the suspension of its Rosella exploration drilling program and being referred to the New South Wales corruption watchdog. Metgasco was publically named by the New South Wales Energy Minister Anthony Roberts on the 15th May when announcing he had written to ICAC. However, the company says ICAC has made it clear there was no information in the referral that was indicative of corrupt conduct.