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An example of Coopers foresight in arranging early east coast gas contracts.

AFR article

Soft gas prices a risk for energy earnings

A slide in spot gas prices on the east coast has been welcomed by manufacturers but, if sustained, could take a toll on producers such as Beach Energy and Senex Energy, and flow through to electricity generators such as AGL Energy and wind power player Infigen Energy, according to analysts.Gas production reached a record on the east coast last year, with more in the offing as Senex Energy ramps up its Roma North and Atlas coal seam gas projects in Queensland and Cooper Energy is due to start up its Sole project offshore Victoria. Santos has also indicated higher output from the Cooper Basin in central Australia and from GLNG in Queensland, while rock-bottom LNG spot prices in Asia are adding extra downward pressure.

JPMorgan energy analyst Mark Busuttil said average gas prices in December 2019 of $6.50 a gigajoule were 31 per cent lower than six months previously, primarily because of increased supply from Victoria and Queensland.

Gas prices have softened on the east coast due to rising supply and weak Asian LNG prices.

Gas producers on the east coast are mostly insulated from the low spot prices as they largely sell their output on term contracts, which sources say are still being offered in the $10-$12/GJ range.

But the weakening in prices is still having an impact, with Santos last week reporting a 27 per cent drop in its average realised domestic gas price in the December quarter from a year earlier, to $4.14/GJ. Mr Busuttil said weak east coast gas prices could emerge as a "headwind" for Santos, even though most of the oil and gas producer's gas sales are on bilateral contracts.

Beach Energy, a standout performer on the stockmarket last year, reports its December quarter production and revenues on Wednesday, which analysts look set to be eyeing for gas price impacts.

Senex managing director Ian Davies said last week that spot and contract prices for gas on the east coast are "very, very different risk arrangements and very, very different pricing arrangements" and said that contract prices bear "very little resemblance" to existing spot prices.

But Credit Suisse analyst Saul Kavonic is still flagging a possible negative impact from softer prices and reduced his long-term price assumptions for uncontracted gas from Senex's Atlas project to $8/GJ from $9/GJ.

Cooper Energy, which is due to start up its delayed Sole gas project off the coast of Victoria next month, meanwhile has "limited" exposure to the weak east coast spot market until 2026 or beyond, Mr Busuttil said.

Electricity forward prices for 2020, meanwhile, have dropped sharply in the past three months, partly due to the softening in gas prices, which has also been driven by low international prices.

Forward curves in all the east coast states have fallen by between $20 and $35 a megawatt-hour during that time, with the steepest declines seen for this March quarter, RBC Capital Markets said.

RBC estimates that if the lower forward prices persist, wholesale earnings will be affected at AGL and Infigen.

Hedging and longer term contracts slow the impact, but if lower prices persist it will impact earnings, RBC analyst James Nevin said in a report, noting that a $10 a megawatt-hour reduction in electricity prices would lower AGL's earnings before interest, tax, depreciation and amortisation in 2020-21 by up to about 15 per cent.

At Infigen, about one-third of revenues is generated from merchant sales, suggesting a $10/MWh reduction in prices would cut 2021 financial year EBITDA by about 5 per cent, RBC said.

UBS last week slashed its forecast for average wholesale power prices this year on the National Electricity Market to $74/MWh, falling to $70/MWh in 2021. It expects more than 4 gigawatts of new renewable energy capacity to come online over 2020 and 2021 which will put downward pressure on average prices and provide earnings "headwinds" for baseload generators.It estimates a $5/MWh reduction in electricity prices cuts AGL's net profit by about $135 million or about 18 per cent, while the impact on Origin's net profit is about $70 million or 7 per cent.

UBS downgraded its call on AGL stock to 'sell' last week, citing lower power prices as the key factor.