‘Super-spike’ to fire up LNG producers

The eye-watering surge in liquefied natural gas prices over the past few weeks is expected to fire up revenue for gas exporters but only a small part of that is expected to show in the December quarter reports.
  1. The eye-watering surge in liquefied natural gas prices over the past few weeks is expected to fire up revenue for gas exporters but only a small part of that is expected to show in the December quarter reports.

    Woodside Petroleum is widely tipped as the best placed to benefit from the historic price rally, which pushed north Asian spot prices above $US8 per million British thermal units in December for the first time since early January. Prices have since smashed records multiple times to reach almost $US32.50 last week.

    One cargo for delivery in mid-February was even reported to have changed hands at $US39.30/MMBTU earlier this month, following an earlier one in the mid $US30s.

    The spike, driven by a mid-winter freeze in Japan, Korea and China, and shipping congestion, compared with the rock-bottom prices of less than $US2/MMBTU for much of the June quarter.

    Back then, Woodside was hurt by its unusually high exposure to the spot market – 46 per cent of its sales in that quarter – but that spot exposure should now play to its advantage even as analysts caution that the “super-spike” will be short-lived and involved just a fraction of total LNG shipped.

    Even so, the soaring prices have set the scene for a stronger than expected first few months of the year.

    Citigroup over the weekend upgraded its forecasts for both crude oil and Asian LNG spot prices and said it expected market consensus upgrades to earnings estimates, notably for Woodside.

    “With the current cold spell expected to continue throughout most of January, Asian LNG demand in Q1 2021 will remain strong, paving the way for additional demand for LNG stocking in the summer across north Asia,” said Wood Mackenzie vice president Massimo Di Odoardo.

    “This, in turn, will reduce the pressure on Europe to absorb excess LNG supply in the summer.”

    Macquarie Equities warily described the recent rally in oil prices to $US56 a barrel as “fragile” and forecast that the LNG price should “retrace significantly” in coming weeks. But it still increased its assumptions for spot LNG prices by about $US1/MMBTU to $US6 in the off-season and $US7 through winter.

    “We expect one key outcome of this LNG super-spike is that customers will start to re-engage more seriously in long term contracts on new sources of reliable supply,” Macquarie said, raising its risk on Woodside’s $16 billion Scarborough LNG project in Western Australia moving ahead up to 80 per cent from 70 per cent.

    It calculated that Woodside has been involved in six cargoes so far to have been priced at over $US10/MMBTU, compared with four for Santos and two for Papua New Guinean producer Oil Search.

    Macquarie lifted earnings forecasts across the board for Woodside, Santos and Oil Search for 2020-2022 and raised price targets for the stocks after reassessing its numbers on the latest oil prices and upgraded LNG expectations. Domestic gas-focused Beach Energy also had its earnings estimates upgraded for 2021-24.

    Credit Suisse analyst Saul Kavonic said it was “challenging” for investors to gain material direct exposure to the spike in prices for LNG, which he described as “bitgas” given LNG’s 21-fold rally since its lows of April 20 “leaves bitcoin in the dust”.

    The northern winter LNG boom has also driven LNG shipping costs to an all-time high, Mr Kavonic said, noting BP had chartered an LNG ship for $US350,000 ($450,000) a day for a US cargo, representing the highest for any ship ferrying commodities.

    Shipbroker Simpson Spence Young said that by the end of December, LNG tanker charterers were snapping up any vessel made available, propelling rates for 15-20-year-old steam engine propelled vessels “well into the six figures”.

    The December quarter reports, meanwhile, are expected to bring further news of the reactivation of major growth projects, bolstered by the more solid prices.

    RBC Capital Markets analyst Gordon Ramsay said the larger Australian producers were “transitioning from a year of significant capex reductions to major project commitments in 2021”. He expected Woodside and Santos to reverse sharp spending cutbacks made in 2020 as they push forward with projects such as Scarborough and Barossa, respectively.

    Source: Financial Review