QLD LNG is a world class balls-up

From Bartho at Dad’s Army:

In the past two days Origin Energy’s Grant King and Santos’ David Knox have countered some of the gloomier prognostications about the economics of their massive Queensland export LNG plants.

On Thursday, King said that on current forward curves for the oil price, Origin expected its share of the distributable cash flow from its APLNG plant at Gladstone to be more than $900 million a year on average from 2017.

While that’s less than the $US1bn a year that Origin was forecasting a year ago, it certainly couldn’t be characterised as the financial white elephant that some commentary on the Queensland LNG plants might suggest.

Today Knox told analysts that the GLNG plant that its consortium is building at Gladstone would prove free cash flow at a $US40 a barrel oil price.

I’m guessing I’m the “gloomy prognosticator” given it was I that dubbed the projects “white elephants” so let me mount a defense!

The figures the good executives are quoting as breakevens are for the marginal cost. They do not include the cost of building the thing in the first place.

That means they’re generating plenty of free cash flow at prices above the breakeven, sure, but when you add your cost of capital and debt and other goodies, the all-in breakeven is much higher.

Isn’t that what it’s supposed to be about? Return on capital employed not return on day-to-day costs?

Second, the forward oil curves look too aggressive. $50-60 is a more realistic price for the next 5 years or more given US shale is the new marginal cost producer and is deflating its buns off.

Moreover, achieved LNG prices are going to dislocate from the oil-linkage. The LNG glut is real and its huge and as customers dump contracted volumes on the Asian spot market over the next five years the pressure on contracts will mount to extreme levels. The oil correction may be (largely) over. But the LNG correction has far yet to run.

Add that all together and you get massively overvalued assets carrying too much debt with terrible returns on equity and a constant risk of yield compression as the entire fat, white elephant slowly deflates.

For Australia more widely the picture is even worse. The rising gas price will hit household incomes and tighten manufacturing margins, to the extent that last year Victorian University modelling illustrated that Australian economic welfare benefited the more the gas price fell in the future.

In short, the east cost LNG industry is a world class balls-up with appalling capital productivity, no real profits, bugger all tax take, more hollowing out and falling incomes. Go ‘Straya!

Comments

  1. Dad’s Army Indeed. Speaking of which what happened to Callam Pickering ? If he has been shown the door MB should be picking up the phone to get him on board.

    B.S doesn’t look like it can go on much longer, not without Nursing staff on hand anyway.

    Smart guy that Mr Pickering

    • “Speaking of which what happened to Callam Pickering?”

      I’m pretty sure he’s on holiday, possibly in China, at the moment. I haven’t heard anything about him leaving BS so I would expect him to be back when the holiday’s over.

  2. As long as it can operate above marginal cost, it can be sold off!! Whoever ends up buying it after the shareholder and banks are wiped off the map will enjoy a healthy profit 😛

  3. Although these are undoubtedly high cost producers I’m not convinced that they will be wiped out. If Origin can generate a free cash flow of $900 million a year from their share of capital investment of around $7 billion then they are totally viable.

    Also there is every chance that they will be able to renegotiate their loans at a lower rate of interest in the future as world capital is in over supply.

    • Last I looked ORG was close to being downgraded and set with 500bps penalty rates on some debt tranches.

      • Anything is possible but I like to keep a little optimism as I’m a long term holder of ORG shares from the time they demerged from BLD.

        Grant King has done very well but the last few years have seen his luck turn, as often seems to be the case with companies that rapidly expand.

      • Geoff, I’ll bet you were peeing your pants when they were 10.50 the other day, Sell now before you get wiped out.WW

      • From Jan 22 – I think WW put me onto it…

        Accordingly, the review reflects the uncertainty about Origin’s ability over the next two years to maintain financial metrics at levels that are appropriate for its Baa2 rating, including FFO/Debt staying above 20%, and FFO/Interest exceeding 4.0x on a consistent basis. Prior to Moody’s recent revision in oil price assumptions, Origin’s rating outlook was negative, reflecting the already limited headroom within the rating.

        Hybrid listed last year
        Change of Control Origin has the right to redeem at par plus accrued interest and any deferred and outstanding interest at any time following a change of control of Origin if, consequent on the change of control, Origin’s credit rating is downgraded by S&P or Moody’s and the lowered credit rating is below BBB and/or Baa2. If Origin does not redeem following a change of control, the interest rate on the Capital Securities increases by 5% p.a.

        http://www.originenergy.com.au/news/article/asxmedia-releases/1603

      • Also reading the report yesterday – that retail business just gets harder and harder.

        I read it as if they were able to stop discounting for a few months and then had to get back on the discounts to stem the churn.

        One helluva complicated business to operate.

        Google Project Crystal also – I would say the banks and ratings agencies aren’t so comfortable.

    • @WW

      I’m not overly fussed about ORG share price. My cost of entry is very low and has been well and truly repaid by dividends over the years. Also I can withstand the loss, and I do consider them a higher risk holding. I won’t be selling as most of my portfolio is defensive and really I have no need of cash. It’s just a problem of where to invest it in these crazy times.

    • Equating money supply with capital is what is destroying the world economy. It is driving force behind the epic destruction of capital through misallocation.

  4. And no reserve price for Australian households-the fundamental ‘owners’ of our mineral wealth, as Australian citizens.

  5. I am not sure the comment ‘rising gas price’ in Australia is based on any evidence, fact or rational thought… Once again it fits your story so you merrily pop it in.

    For example, at the gas prices you are talking about there is no economic case for building the additional infrastructure required to allow Victoria’s gas to be traded into the international market.

    • Go and read the archive before you carry on with this drivel about me making stuff up. Everyone knows the gas price is going to rise. I’ve argued that it will rise far less that most.

      As well, I reference VU.

      Be warned, once more with this tripe and you’re banned.

  6. HnH, Correct. and, one thing I had over looked was the elevation of the project site on Curtis Island with regard to mean sea level. I am now aware of the considerable tidal surges which are associated with cyclones,
    I didnt think 12m plus was possible.
    My call is that at least their ship loading facilities and marine facilities will go under should we get a decent low. WW

    • After a couple of phone calls, 12m above a normal high tide will put the processing area under water..
      Force Majeure, 3d, Not. Bad design. WW

      • If it happened, force majeure!

        My understanding is facility built to withstand Cat 7 cyclone and associated tidal surge.

      • 3d. Best I can find for the most severe cyclone is a Cat 5, where could I find the characteristics of a Cat 7 cyclone?? WW

      • @ 3d

        Cat 7?!….. LOL! Have you seen an LNG processing facility? I don’t think it would go too flash on the back of a truck travelling at 450 km/h….

        Thankfully Marcia proved a non-event – Yeppoon recorded max winds of 140 km/h. Something like Yolanda which tore into the Philippines in 2013 with sustained winds of 275 km/h would be a very different story.

      • Apologies. My bad. Earthquake mag 7!

        Indicative tidal considerations

        ‘Tidal inundation of the tidal flats may also occur during storm surges that enter Port Curtis. Storm tide statistics for Gladstone suggest that the 100 years ARI storm surge level may be 0.8m above the HAT level (Harper 1998) with the 1,000 years ARI storm surge level approximately 1.7m above HAT level. Thus, land below approximately RL 4.3m AHD may be inundated in extreme ocean storm surge events. Volume 4 Chapter 10 provides an estimated 1,000 years ARI storm surge level of 4.41m AHD, with allowance for projected climate change effects.’

  7. Saudi Oil Output Rising Amid Fight for Market Share – Bloomberg Business

    http://www.bloomberg.com/news/articles/2015-02-19/saudi-arabia-oil-production-rises-to-about-10-mln-b-d-pira?cmpid=yhoo

    (Bloomberg) — Saudi Arabia is boosting oil production, pursuing its policy to maintain market share as prices fall.

    Crude oil output is about 10 million barrels a day, New York-based Pira Energy Group said in a weekly report, citing discussions with Saudi customers. That would be the highest since July and up from an average of 9.7 million barrels a day in the second half of 2014, according to data from the Joint Organisations Data Initiative, an industry group supervised by the Riyadh-based International Energy Forum. … read more via hyperlink above …

  8. “lng correction has far yet to run”

    Lng is linked with oil prices. If you’ve seen the oil bottom and made a bet in oil gas producers you should know lng was already bottomed out.

    Did you hear the Gas Ramp Up in Qld before Santo made its first gas feed into pipelines to Curtis Island. Santo said it can store gas as well as Origin for later days. Origin has massive gas terminals in Victoria and is a joint venture with almost small-mid producers both on-shore and off-shore all aound Australia.

    Did you know how Woodside could sell lng ( $3.5 mbbu )to asia Below spot prices ($6.7mbbu)in Singapore. Please join me in at Icn forum.

    Even though Origin bought cheap gas but It will not pass to its customers. It will compete with international spot prices in Asia due to the Free trade A. I think It will at later days to compete with Energy Australia once It could turn to bigger profits in conjunction with local gas prices trebled.

    • Yeees, I know all of those things. But I won’t be joining you anywhere because they are all irrelevant to this post, which you clearly haven’t read before criticising it.