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‘Reasonable price’ rule threatens Origin deal
Angela Macdonald-SmithSenior resources writer
Feb 2, 2023 – 5.16pm
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The risk that Queensland’s LNG producers will be forced to sacrifice exports to avoid shortages among local customers as a result of the federal gas price intervention has emerged as a threat to the proposed $18.4 billion takeover of Origin Energy.
An investment strike on new gas developments because of
the ongoing gas price controls envisaged by the government has raised fears LNG will need to be diverted from export to keep the local market supplied in the years ahead.
MidOcean Energy CEO De la Rey Venter has said EIG was anticipating some energy price intervention in Australia. Janie Barrett
That would potentially eat into valuable long-term LNG sales contracts for the three Queensland exporters, including Origin’s Australia Pacific LNG venture. Some of the gas would have to be sold at markdown prices in the local market instead, market sources suggest.
The theory helps explain how the shock gas market intervention in December has put big questions around the long-term value of Origin’s LNG business. The issues may take several weeks to resolve becuase the detail of the ongoing price controls are still being worked out, leaving little prospect of any deal in the short term, some say.
It comes as the competition regulator last Friday issued a fresh warning about looming shortages in the east coast gas market
that by 2034 are forecast to reach more than half the current market size, even before the impact of the intervention.
A report by The Australian Financial Review’s Street Talk column that Origin’s suitors, Brookfield and EIG Partners, are looking to cut the price of their $9-a-share offer as a result of the intervention threatens to again shake market confidence about prospects for a deal on the original terms, even after
Origin’s surprise profit upgrade last Friday.
Shares in Origin dipped as much as 1.5 per cent to $7.30 in early trading on Thursday as investors digested the latest reports, which neither Origin nor its two North American bidders would confirm.
‘Testing the board’s resolve’
The latest drop leaves the stock almost 19 per cent below the mooted offer price, a gap that has never been less than 9.4 per cent since
the takeover proposal was announced on November 10, reflecting the many remaining uncertainties including approval from the competition watchdog.
Market sources say the bidders’ concerns primarily centre on the impact of the gas market intervention, particularly on the circa $7 billion valuation ascribed in the total transaction value to Origin’s integrated gas business, which houses its stake in giant Queensland LNG venture Australia Pacific LNG. The Energy Markets business, which Brookfield would buy, is also affected.
They say that while several analysts have assessed the impact of the intervention as immaterial to Origin’s profits and value in the short term, the key issue for EIG, whose MidOcean Energy business would take Origin’s 27.5 per cent stake in APLNG, is over the long term.
Even though EIG’s MidOcean has said it was anticipating some government moves to cap gas prices – as has happened in several other countries – the ongoing regulation of prices goes much further.
Ben Goodwin, a portfolio manager and analyst at Origin investor Merlon Capital Partners, said he would not be surprised if Brookfield and EIG were looking to cut the price.
“It is pretty unlikely that they are not going to test the resolve of the board on the $9 given they can point to something that has changed,” Mr Goodwin said.
“A level of regulatory change that is massive for any type of any nation ... it’s regulatory risk, and that’s gone up.”
He said that with Origin shares trading about halfway between the pre-bid price of $5.81 and the $9 proposal, the market was taking an even-chance view on whether the deal would go ahead or not.
“There’s about 20 per cent upside and 20 per cent downside, so the market itself is basically almost perfectly unsure about the possibility,” he said.
Of most concern for EIG is the government’s plan for the ongoing regulation of gas prices on the east coast through
“reasonable pricing” provisions included in a mandatory code of conduct that is still going through consultation, analysts say.
While the details of the code have yet to be finalised, they say the hit those rules could have on new investment in domestic gas means LNG exports from Queensland will have to be constrained to avoid shortages in the domestic market. As the biggest exporter of LNG from Queensland, APLNG is right in the firing line.
‘Inevitable’ LNG curtailments
Credit Suisse energy analyst Saul Kavonic said the risk that LNG exports would need to be limited under the new gas market rules posed the biggest threat to the valuation of APLNG, rather than the lower prices the venture was likely to receive for gas it would already be selling into the east coast market.
“Unless it is walked back, Labor’s gas policy will almost inevitably lead to Queensland LNG exports being curtailed, likely to the point of eating into export contracts within several years, as the market witnesses a faster decline of domestic supply,” he said.
Mark Samter at MST Marquee has also suggested the government’s intervention will have a knock-on effect on Queensland’s LNG exports, not just in terms of spot LNG exports but also on LNG long-term sales contracts held by Shell’s QGCLNG and Santos’ GLNG as well as APLNG.
“Mathematically, I really don’t see how there won’t be a forced choice between breaking export contracts or short-falling domestic buyers,” Mr Samter told clients in a note this week.
However, the details of the “reasonable pricing” provision are yet to be set out, and submissions on the code of conduct are only due on February 7.
Given the threat to future gas investment on the east coast made clear by companies ranging from major ExxonMobil to Senex Energy as well as warnings from the competition regulator about looming domestic gas shortages, it is still possible the government will relax some of the more stringent aspects of the plan and put in place a mechanism that does allow further investment.
However, that will not be known until the code is finalised, expected in March, meaning EIG would not be able to come to a firm view on the valuation of APLNG for another month at least.
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