From Macquarie Bank:
ORG has stayed a re-emerging financial risk that in a low oil price environment APLNG will require a cash injection to establish the debt service reserve ie 6 months of interest expense and debt amortisation (~$750m) along with the opex reserve (~$700m) instead of internal earnings. Such a commitment would absorb much of ORG surplus cashflow and flexibility in the underlying utilities business. ORG highlighted that at US$20/bbl oil, the capital contribution is ~$282m (hedge premium plus contribution) instead of ~$600m, a net saving of $300m post hedge costs.
As a result, ORG has a floor exposure of ~A$47.20/bbl but a breakeven point closure to ~$62.80/bbl (previously A$55/bbl) once the cost of the hedge is accounted for, which is similar to the FY17 forward price currently and well below MRE’s oil price forecast. FY18 forward prices are far more robust at ~$80/bbl suggesting APLNG profitability will rebound with a ~$0.4bn return to ORG. Thus the hedge alleviates the near-term financial stress, albeit if oil prices do not recover, ORG will potentially need to hedge again this time next year.
