Post-Gas Code Revision (42c target price)

Australian E&P SectorGas price cap relief for smaller producersThe Labor Government has announced revisions to the Gas Code governing price caps and other provisions for east coast gas producers. Under the prior iteration, producers were subject to a A$12/GJ price cap and “reasonable” rate of return profiles with limited scope for exemptions. The revisions ensure that exemptions are accessible to small producers on the proviso that adequate supply is made available into the domestic market (Figure 1). Hence, we see these changes disproportionately impacting the major QLD gas-to-LNG producers – Shell, STO, APLNG etc. – compared to the “little guys” like COI, BLU, VEN, COE etc. With small caps trading significantly below pre- regulatory intervention levels, we feel a period of “catch up” is warranted (Figure 2). Maintain BUY on COI (PT A$0.42/sh) and BLU (PT A$0.36/sh).Revisions to the Gas Code• Prior version of the Albanese Government’s Gas Code introduced a mandatory A$12/GJ price cap for 2023 supply, with “reasonable” pricing required thereafter for all producers.• New version of the Code extends the price cap timeline to 2025 but provides exemptions for small domestic producers. We expect these exemptions to extend to the likes of BLU, COI, COE, VEN etc.Small cap domestic players are the beneficiaries• As with Labor’s Carbon Plan (see Labor's new carbon plan - the facts) we see large gas-to-LNG players in QLD as the most negatively impacted by the revised Gas Code. Notwithstanding this, Arrow, APLNG, Shell, STO etc. have multi-asset diversified portfolios capable of withstanding regulatory changes.• Large caps, burdened by price caps, are likely to continue pulling back on new investment. Lack of new supply will drive prices higher, enabling small caps (not burdened by price caps) to benefit (Figure 3, 4).Despite that, small caps are underperforming...• Despite small caps likely receiving exemptions from the regulatory changes, our Petra small and large cap east coast gas indices show that small caps have underperformed the large caps by 38% since the onset of the Gas Code in December and have not caught up since the revisions (Figure 2).• We see a strong likelihood for a period of a catch up, with small caps outperforming the large caps.• We believe Comet Ridge (BUY, PT A$0.42/sh) and Blue Energy (BUY, PT A$0.36/sh) are beneficiaries with significant share price re rate potential as the market digests the recent developments.