PORTFOLIO POINT: Gas producers are in the box seat for a low-carbon economy. Coal miners are at the other end of the spectrum.
Speeches delivered by Barack Obama have made one thing abundantly clear. Some kind of worldwide agreement on carbon emissions will be reached in at the global climate summit in Copenhagen in December. Kevin Rudd has been equally direct: Australia will almost certainly fall in behind the US.
What remains to be seen is the form it will take. Will they choose to use the light touch or will it be punitive? A scheme involving light taxation of carbon is going to have a minimal impact. But if they go down the other route – seeking hard targets and making big reductions – it will have a huge impact on the global energy market.
There are going to be very clear winners and losers from this, it’s an issue that will create haves and have-nots. It’s enormously bullish for the producers of gas and uranium. It’s going to make life incredibly difficult for the fossil fuel guys, especially coal. It’s probably going to be the biggest turning point in the Australian energy market in 20 years.
The winners
The companies producing gas are in the box seat. In a low-carbon economy, gas is the fuel of choice. The obvious winners in this are the pure-play gas companies such as Arrow and Eastern Star Gas. Beyond that you have your other the larger energy companies with heaps of gas like Santos and Origin.
This obviously includes Woodside as well. A system of heavy carbon taxes would mean Woodside has absolutely no trouble in getting up its Browse project, which has about 14 trillion cubic feet of gas. A tough carbon regime could quickly push Woodside back into the mid-$60 dollar mark over the next couple of years as the market begins to factor that in.
Right behind the gas companies are the uranium players. It takes 10–15 years to get one of these power plants up, which gives gas a good head start. Again, it’s the pure plays that are going to benefit the most, so the explorers and companies like Paladin are the best placed.
The integrated players such as BHP Billiton are not going to be terribly concerned either way. They’ve got gas, they’ve got oil and they’ve got uranium. Whichever way it goes, companies like BHP and Rio Tinto are not going to be overly affected.
One company that has been very quiet on carbon is Leighton. I’ve been informed that Leighton has been working on the quiet on various projects that could become very attractive. Specifically, I understand that Leighton has joint venture wave energy project somewhere off the Victorian coast. Apparently it is a major scheme and Leighton is just waiting to see what the landscape is like. I can only imagine how the market would treat something like that in an event of some major restrictions.
Next in line are the engineers. This group includes WorleyParsons, United Group and Monadelphous. In the event of big changes there is going to be a whole lot of retrofitting going on as companies try and get their plants up to speed. This is potentially a huge payday for the engineers and could create many billions of dollars work for them.
The losers
At the other end of the spectrum are the pure-play coal miners. So far the share prices of these companies have been supported by the idea that the Chinese will continue to need coal for power generation, and the possibility of takeover activity. An agreement that changes the emphasis of power generation will strike at coal first. That’s your Whitehaven, Macarthur Coal and Centennial Coal. It’s not going to completely ruin their business, but it will have a severe impact at the margins where their excess return will be gobbled up by carbon taxes.
Your next group of companies to run into difficulty will be producers of energy-intensive raw materials, so that’s going to include steel. OneSteel and BlueScope are going to need to come up with some way of hedging their carbon exposure, perhaps by investing in companies that produce carbon credits. Put it this way, buying CSR’s sugar business would cancel out OneSteel’s carbon tax liability.
Aluminum is another problem area (see Risky businesses). Alumina is the only meaningful manufacturer of note in Australia but there is also a lot of aluminium hopefuls scattered around the place. They are going to have an extremely tough time getting financial backers.
Red herrings
There are a couple of sectors that might see a small bounce but are unlikely to benefit over the longer term. Don’t be fooled by agribusiness schemes. Carbon needs to be captured and stored permanently so these kinds of grower schemes won’t meet the criteria for re-rating.
You may also see a geothermal stocks get a bit of a kick along but our market does not really have any proved-up resources. There were about 25 geothermal companies at last count and they are all 10–15 years off being commercial. The chances of any of them making any money over the medium term is very remote.
Most large corporates have had some idea that this day would eventually come and have been preparing by scenes for the opportunities and challenges it presents. In the series of meetings leading up to Copenhagen we have seen some of the strongest signals yet that we are moving in the direction of real change.
Offering developing countries extremely attractive incentives like seats on the IMF is not an empty gesture. Make no mistake: the US is pulling out all the stops to get more countries on side to reach a global consensus on carbon reduction.
Ivor Ries is the head of research at stockbrokers EL&C Baillieu and Company. He may have interests in any of the stocks mentioned.
ESG Price at posting:
90.0¢ Sentiment: Buy Disclosure: Held
