In Australia, all the action is on the ground. Energy stocks were hit big time in Friday’s trade. Santos [ASX:STO] finished down a whopping 13%. The ‘defensive’ Origin Energy [ASX:ORG] fell 7%.
Both of these companies have major LNG projects on the go. As I pointed out on Friday, taking investment costs into account, these projects aren’t looking so good with oil prices at current levels.
Let me put the situation into perspective for you. Last week, the Bureau of Resources and Energy Economics published their six monthly update on major resource and energy projects. Here’s an excerpt from the introduction, my emphasis included:
‘As at October, there were 44 projects at the Committed Stage with a combined value of $228 billion compared with 48 projects with a combined value of $229 billion six months earlier. LNG projects continue to drive resource and energy investment in Australia, accounting for around 87 per cent of the value of committed projects.’
So there is nearly $200 billion of investment underway in Australia right now devoted to the production of LNG. And a lot of it is going to hit the market next year, which won’t help the price environment at all. That means returns on capital for these projects will be much lower than projected.
I know these projects are long term…they’re going to produce for 20 plus years. But in the short term, the low price environment will do some major share price damage.
A company’s intrinsic value is all about the returns it generates on shareholder capital. In the case of Australia’s big energy companies who have invested in LNG, these returns, in the short term at least, will be poor. No wonder share prices are taking a beating.
It’s a sector I wouldn’t want to be in for a while. Sure, you’ll probably see a rebound soon and at the end of the price rout there will be some bargains, but for now you’re better off standing aside and waiting to see where the dust settles.
For The Daily Reckoning Australia