Today’s Blog – Tuesday 6th December 2016

Editorial

Today’s editorial looks at this morning’s announcement from Origin Energy (ORG) about plans to spin out its conventional oil and gas assets through an an IPO on the ASX next year.  ORG will not retain a stake in the Newco (although it will encumber it with gas sales agreements over reserves and possibly call options over resources).  The cash from the IPO will be used to reduce ORG’s large debt load.

Our key initial takeaways:

  • We have thought for some time that post the Grant King era in ORG that new management would seek to focus on its downstream energy business and find ways to divest its upstream interests.
  • ORG has today said it will keep its CBM to LNG assets in Queensland (as well as some other assets – see below).  However, we take that statement with a pinch of salt and expect ORG to sell its APLNG stake in due course.  The most obvious buyer would be JV partner Sinopec.  However a far more intriguing play would be to combine this with Santos – giving rise to some much needed increased materiality in Australia’s “too-small-to-play” LNG companies.
  • We had thought ORG would pursue a trade sale of its ex-APLNG assets – and that an IPO would realise less cash than a sale of a rare package of low sovereign risk assets to e.g. a Chinese sub-NOC E&P.  However, what an IPO does bring is much less execution risk in terms of FIRB, etc, intervention – and indeed given the Australian gassy weighting of Newco, Australian investors should currently understand the value proposition.  The announcement of an IPO of course invites any interested trade buyer to come along and make an offer.
  • ORG will retain its Northern Territory focused assets – shale gas in the onshore Beetaloo Basin and offshore conventional gas in the form of the expensive Poseidon asset in the Browse Basin.  We presume the retention of these somehow fits strategically with ORGs partnership with Conoco in APLNG and the latter’s potential desire to play these NT focused assets as it seeks the optimal path for the back-fill next decade of its operated Darwin LNG liquefaction plant.

Commodity prices

Crude had its first small retracement since last week’s OPEC meeting in overnight trading, with both London and New York down a tad, to US$54.41 and US$51.25 respectively.

No particular news drove the trading – although it was noted that a large amount of hedging has been put in place in the last few days by the US shale producers – which some fear signals much increased production by them next year.

Henry Hub continued on its upwards run, closing up a material ~6% at US$3.64.

LNG and international gas

All is not always rosy in the PNG LNG patch, notwithstanding its general viewing as one of the best LNG investment locations in the world.  The country’s Treasurer has recently said he wants to increase Government take on the next LNG project – and have more project equity go to restive landowners.

Over in Korea, Kogas appear to be adopting a somewhat half-hearted strategy of building up the country’s “LNG hub” characteristics, with investment in more bunkering facilities and talk of trading, spot prices, etc.  The effort seems lame compared to rivals in Singapore and Japan.

Governments, fracking, etc

Yesterday the Federal Energy Minister called for an emergency meeting of the nation’s leading gas producers (“quick, find, discover and market some resources within the next few months!”).

Meanwhile, as we noted yesterday, energy infrastructure company DUET was the subject of a takeover approach that valued it at 50% more than its book value.  If only the Energy Minister could look beyond energy commodity markets and see the blatant demonstration that companies like DUET systemically hoodwink Government regulators about their cost of capital – hence deriving massive economic rents from energy consumers that over-shadow the implications of upstream energy price changes.

Quote of the day

A quote on cause-and-effect in energy markets from the Energy Minister of the People’s Republic of Victoria, a jurisdiction that has banned petroleum exploration and production within its green and pleasant (and 50 Mtpa brown coal burning) borders:

“We are seeing gas prices that are increasing as a result of the fact that we are having gas … for the first time exported globally from Queensland.” – Victoria Energy Minister Lily D’Ambrosio

 

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