The cascade of Australian and offshore energy companies taking billions of dollars in impairments on the back of the historically depressed price of oil and gas continues, with the latest coming from Woodside Petroleum and Origin Energy.
For the most part, investors have taken the write-downs, though large, in their stride. That’s because everyone knew they were coming.
Investors shouldn’t read too much into these big 10 digit balance sheet adjustments. Firstly, because for the most part they are non-cash items, but more importantly because they are based on each company’s assessment of future oil prices. And to be frank that’s more guesstimate than science.
And this is why there is some significant disparity between oil price forecasts. The longer term the horizon the more variation there is.
The most optimistic projections lay much of the blame for the woeful oil price at the feet of COVID and its impact on the global economy and in turn the demand for oil. But equally many subscribe to the view that COVID has hastened the longer term structural shift in lowering demand for oil.
The chief executive of LNG producer Woodside, Peter Coleman, falls into the former camp. He is not a believer there has been permanent destruction in demand brought about by COVID.
“The world just doesn’t work that way,” he says.
“The energy demand is still there and the ability of renewables to fill the void is not there. The demand destruction in the short term is due to [less] aviation travel and it’s [only] a matter of time as to when this comes back,” he says.
And Coleman is firmly wedded to the view that in the longer term there will be a dislocation of the current link between oil and gas pricing – that is gas prices will firm and oil demand will drop for two reasons. Firstly, because there is more oil supply in the world and secondly because gas is a necessary part of the energy transition so has a number of years of strong demand.
So how does Coleman account for the different oil forecasts produced by various oil companies?
He says different companies have different reasons for the way they value assets. Some have announced changes in strategy as they transition to a different business model. BP, by way of example, has a $US55 long-term price on oil.
You could equally argue that it is BP’s belief in the long term decline in oil prices that is informing its choice to transition.
While Woodside is a believer in the long-term positive prognosis on gas prices, it is hedging its bets in the short term. For the moment Woodside has placed on hold a final investment decision to develop two large projects off the coast of Western Australia – Browse and Scarborough – until it has a better read on future prices. It will continue to kick that decision-can down the road until it sees three consecutive quarters of firming oil prices that are “consistent with economic fundamentals”, according to Coleman.
Meanwhile, the big write-downs in the value of oil and gas assets, have (as they often do) a cosmetic feel. What the major Australian energy producers are yet to tell the market is what the fall in the oil and gas price has meant for underlying profit in the six months to June 30.
Coleman has, at least, assured analysts there will be a profit in this period.
And Origin says it expects no change to its full-year guidance – thanks in part to being cushioned by its retail energy markets business. But brokers are now expecting profits from the energy markets business to come in towards the lower end of $1.4 billion to $1.5 billion.
The earnings pressure will come from Origin’s investment in Australia Pacific LNG which accounted for the lion’s share of the asset impairment charge it announced on Wednesday.
Lower LNG prices will be more fully reflected in revenue and earnings in the current 2021 financial year. Origin provided no update to the advice it gave in April that it expects total cash distributions in the 2020 financial year from Australia Pacific LNG of between $1.1 billion and $1.3 billion.
We will get a clearer view in August.
But our local energy players including Woodside, Origin and Oil Search have been upfront about a range of mitigating measures including slashing capital expenditure, costs and placing the final investment decisions on new projects on ice.
Extracted from Brisbane Times