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Woodside rides the boom in natural gas prices

Lewis Jackson  |  08 Oct 2021Text size  Decrease  Increase  |  
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Soaring natural gas prices are set to boost short term profits at Woodside Petroleum even as gas shortages in the northern hemisphere highlight the fuel's importance to the clean energy transition, according to Morningstar senior equity analyst Mark Taylor.

Woodside Petroleum (ASX: WPL) is up 27% since September as a global race for natural gas ahead of the northern hemisphere winter sent prices spiralling. The S&P Global Platts Japan-Korea-Marker, a widely used benchmark for spot LNG, rose to US$56 on Wednesday, up 62% in a week. UK natural gas closed at $245 on Thursday, up 92% since 1 September.

The energy rally has nudged Woodside back into positive territory, with the stock up 9.8% year-to-date. It closed Friday at $25.35, a 37% discount on the fair value estimate of $40.

The oil and gas producer benefits from surging prices because it sells as much as 30% of its gas in short-term spot markets, says Taylor. The remainder is sold on long term contracts linked to the price of Brent crude oil, which has also risen 14% since the start of September.

“They’ve had a policy over recent years of lessening the amount of sales linked to long-term contracts, so they could be getting some really interesting prices in the current environment,” he says.

A reliance on spot markets, an overseas client base and greater exposure to gas means Woodside is best positioned among the Australian energy producers to profit from energy market turmoil, says Taylor.

Fellow producer Santos (ASX: STO) sells 90% to 95% of its output via long-term contract. It also sells more of its gas into domestic markets.

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To date, the rising tide has lifted all boats. Santos has risen 21% since September and Oil Search (ASX: OSH) is up 19.8%. Beach Energy (ASX: BPT) is 37% higher.

Longer term, Taylor says ructions in energy markets highlight the importance of natural gas as a transition fuel between coal and renewables. Natural gas produces about half the emissions of coal when burnt, according to figures from the US Energy Information Agency.

“The market has been naively discounting the natural gas future into the short and medium term,” he says.

“This is a wakeup call that it has a medium-term future at least.”

The spotlight on natural gas comes as Woodside mulls an investment decision on its multi-billion-dollar Scarborough gas development. A final call is expected by year end.

To the degree that concerns about the long-term desirability of natural gas had weighed on the investment decision, more positive sentiment may improve the odds of approval, says Taylor.

Global hunt for natural gas heats up

Surging natural gas prices around the globe reflect demand outpacing supply, says Allen Good, a Morningstar energy strategist in Amsterdam.

Europe has turned to natural gas as lower winds hit renewable energy output and a hike in carbon credits made coal more expensive, he says. At the same time China has increased its reliance on natural gas as it pushes forward with plans to cut emissions.

“Everyone is battling over natural gas where there is limited supply,” he says.

In China, the government last week ordered utilities to source fuel at any cost as coal shortages caused blackouts in several provinces.

The boom in demand comes as natural gas plants have been hit by outages and traditional suppliers such as Russia have been slow to intervene.

Some analysts have argued supply has also been constrained by years of underinvestment due to pressure from environmental groups and investor reluctance to back fossil fuels.

Philip Lambert, head of Lambert Energy, was quoted in the Financial Times last Friday arguing that net-zero policies had led to an underinvestment in natural gas.

Good says the reticence around new natural gas projects has more to do with capital discipline than kow-towing to environmentalists.

“Money was spent on projects when oil was at US$100 and you had a rash of overspending. Share prices and returns suffered, so companies cut back” he says.

“It was more an issue of managing returns and growth than a question of renewables.”

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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