Day: March 29, 2019

Analysts expect depressed US gas prices to continue

THE bargain-basement US gas prices that forced a $US2.8 billion devaluation of BHP Billiton’s Fayetteville shale assets last week look set to continue for the short-to-medium term, analysts say.
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Wood Mackenzie head of oil and gas Noel Tomnay told BusinessDay last week that the US market was ”disconnected from the rest of the world” with the Henry Hub gas price trading around $US3/mmbtu while European prices were at $US8-9/mmbtu and Asia-Pacific spot prices at $US14/mmbtu.

Mr Tomnay said the Henry Hub price would not reach the $US5/mmbtu range for six to eight years, when new LNG export projects would link the US market to the rest of the world.

”We do see quite a lot of LNG coming out of the US and Canada,” he said, ”perhaps not quite 100 million tonnes per annum [as in Australia] as not all projects proposed will go ahead, and by the time you have shipped from the gulf coast to Japan it ends up costing $US11-12/mmbtu.”

For its part, BHP expects the gap between natural gas prices in the US and elsewhere will narrow in the longer term. The Henry Hub price was $US3.20/mmbtu at the end of July, up 67 per cent from its April 19 low of $US1.91/mmbtu.

Macquarie Bank head of oil and gas Vikas Dwivedi said the gas price may not have bottomed. ”The rally has been delivered by unbelievably hot weather. Then there’s been so much fuel switching, from coal plants turning off and natural gas plants replacing them. But these are both what I call ‘fast friends’. And these fast friends could disappear fairly quickly.

”If you don’t get real structural demand growth, via new homes or factories and industrial facilities that burn gas all the time, you’re not getting real demand growth.”

Mr Dwivedi said the April 19 low, ”may have been the bottom, I’m not calling for a massive meltdown in prices and I don’t think we’re going to go back down to sub-$US2 any time soon, but I’m hard-pressed to see how we continue to rally here, unless the weather helps out”.

”If we take a weather-normal view, the answer is the supply/demand balance is pretty bad. We need supply to really adjust downward,” he said.

Mr Dwivedi said there was factual and anecdotal evidence of new ”sticky” industrial demand for gas, from committed or planned investment in petrochemical plants, primary metals and automobile manufacturers.

”The most recent is methanol, which is an extremely energy-intensive chemical,” he said. ”There are a lot of proposals, a lot of interest. The one thing all these have in common is that they are all long lead-time projects. Nothing is going to show up of any real size in the next few quarters. We’re talking 2016-17, when a lot of new facilities will come on at the same time.”

A faster source of new gas demand was the potential acceleration of coal-fired power generator shutdowns. ”Right now there is roughly 30 gigawatts of coal plants who’ve already given formal notification they’re going to shut down,” Mr Dwivedi said.

He described the shutdowns as semi-permanent. ”The intent is for the shutdown to be permanent, but if they don’t knock the facility down, they can always re-start it – maintain a skeleton staff to just keep the rust off it. But the intent is to shut it down permanently.”

If gas prices rose substantially, he said: ”You could say, of all the coal plants that are shut down, maybe 20 per cent could come back on after a few months to a year – could be un-mothballed – but most of the rest will stay shut.”

That view is not universal. UBS commodities analyst Tom Price said fuel switching from coal to gas started happening when the Henry Hub gas price fell below $US3.50/mmbtu and, once it returned to those levels, ”we should expect a reversal of the trade”.

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Rubbery outlook for Ansell boss

THE Swedish chief executive of Ansell, Magnus Nicolin, seems to think one might have a more lucrative career predicting the direction of the European economy rather than running a latex glove and condom concern.
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At a media conference yesterday regarding Ansell’s €101.5 million ($118 million) acquisition of the French glovemaker Comasec, Nicolin was asked to provide his views on the European economy.

”If I knew exactly where it was heading, I wouldn’t be working here,” he said.

Transurban legacy

THE new chief executive of Transurban Group seems to think it is a tad premature considering what he wants to leave behind when he eventually departs the company.

When asked what kind of legacy he wanted to leave at Transurban, Scott Charlton assured analysts that he would keep a leash on his ego. ”I’m not trying to build an edifice to myself. I am not trying to build a Scott Charlton legacy,” said Charlton, who only started at the company three weeks ago.

The former Leighton and Lend Lease executive, however, did concede he was something of an infrastructure nerd.

”I love the sector, I love the big assets. They are fun to be part of and as an engineer, I love the complexity of the networks and sort of how everything operates together. So the sector interests me and some people might see that as weird,” said the former designer of missile guidance systems.

On the issue of legacies, Transurban also disclosed that its former chief executive Chris Lynch enjoyed a tidy 9 per cent lift in remuneration in his final full-financial year to $7.36 million. In the lead-up to Lynch’s departure, the company stressed he resigned rather than being terminated. This means he will never have the chance to leave a legacy the same size of his predecessor Kim Edwards, who departed the group with a $5 million ”strategic milestone incentive plan bonus”, a $3.2 million ”business generation plan incentive”, a $1 million short-term incentive payment and a $5 million termination payment.

Music to their ears

MELBOURNE composer Noel Fidge has claimed to have ”reinvented” the modern musical by coming up what it is certain to be a new genre: an anti-gambling musical.

A Garden of Money, which will be staged in North Melbourne from August 23 for five days, revolves around a well-off stockbroker and his gambling addict wife.

But the recent track record of finance-related stage entertainment has been rather patchy. In 2010, a British play about the Enron collapse closed after just 15 performances on Broadway.

Labelled a ”flashy but laboured economics lesson” by the New York Times, Enron lost an estimated $4 million in the US.

However, EuroCrash! The Musical continues to power on after opening on the London West End last year. ”It is a parable, and a dreadful warning about what might happen if certain steps … to save the eurozone are not taken,” says the musical’s website.

AMP plummet

AMP chief executive Craig Dunn’s Christmas hamper might be a little lighter this year, thanks to the 40 per cent dip in the company’s share price to $4.05 since late 2009.

The company lodged a change of director’s interest notice disclosing that 777,778 performance rights granted to Dunn in March 2010 had lapsed at the end of July.

CEO bonus cut

ONE wonders whether the heavy engineering concern Bradken’s 49 per cent lift in annual profits will be enough to temper any of the remaining shareholder angst in relation to the remuneration of its senior executives.

Despite posting a better than expected $100 million net profit and 3.8 per cent lift in dividends for the year yesterday, the cash bonus paid to managing director Brian Hodges was cut from the previous year’s controversial $819,000 to $393,000. At last year’s meeting more than 20 per cent of shareholders voted against the remuneration report, where Bradken’s key management personnel were paid the equivalent of 17.5 per cent of Bradken’s operating cash flows. But while Hodges’ bonuses have been trimmed, his fixed pay is still well out of the RBA’s inflation comfort zone. His base pay for the year to June 30 rose a hearty 12 per cent to $1.28 million.

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RBA breaks silence on soaring dollar

The Reserve believes the dollar is soaring because foreign investors have settled on Australia as a safe place to park their money.THE Reserve Bank has turned to ”open mouth” operations in a bid to hold back the rising Aussie dollar.
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The Reserve inserted a sentence of exchange rate commentary into the statement released after yesterday’s board meeting in a conscious attempt to let the market know it thought the dollar was higher than could be justified by the usual metrics. The sentence said the exchange rate had “remained high despite the observed decline in the terms of trade and the weaker global outlook”. The Aussie-US exchange rate has climbed 6 per cent during two months in which base metal prices have fallen 6 per cent.

The Reserve believes the dollar is soaring despite the lower prices because foreign investors have settled on Australia as a safe place

to park their money. A big part of yesterday’s Sydney board meeting was given over to discussing the high dollar and what – if anything – to do about it.

One option – not ruled out – is to intervene in the foreign exchange market by selling dollars and buying foreign currency as the central bank has done on rare occasions in the past.

This option carries a risk of being stuck with foreign assets that would turn out to be bad investments, a criticism that can be levelled at China’s policy of investing abroad in order to hold back its currency.

The Reserve is taking the view for the moment that there is little evidence of broad economic damage flowing from the high dollar, meaning it can wait. Economic growth is strong, employment is climbing and inflation is low.

If needed, the Reserve would restrain the dollar in other ways, by feeding concern about the high dollar into its decisions about whether to cut interest rates; in the same way as it feeds concern about bank funding costs into those decisions.

For the moment it is watching the dollar, letting people know it is watching the dollar, and keeping its options open.

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Leighton insists it sees an upside but reality bites

TAKING a contrary view of the world always gets a headline, and in Leighton Holdings’ case, it released a poor set of interim results but went against the prevailing view that investment activity is declining.
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The positive spin didn’t do a lot for its share price, which fell against a rising market.

In a statement to the ASX, Leighton boss Hamish Tyrwhitt said: ”Contrary to commentary suggesting a decline in investment activity in Australia, the group’s addressable markets have never been stronger.” It backed it up with record work in hand of $47 billion, reaffirmed its full-year profit guidance of $400 million to $450 million and indicated it had a pipeline of $29.9 billion worth of work that it had tendered for as at June 30.

This upbeat outlook came as Australian Industry Group (AIG) released a worse-than-expected construction index for July that showed the industry continues to contract at an accelerating rate.

AIG’s construction index dropped 2.2 points to 32.6 for July. (Anything below 50 means the industry is going backwards.)

It reflects a growing chorus of mining executives who are warning that some big projects will have to be mothballed due to a blowout in labour and equipment costs.

But for Leighton, the more projects it can win the better it is for its bottom line. As soon as a project is started a construction company can start booking a profit on a monthly basis. Some companies wait until a project is about 20 per cent complete before booking a profit, but Leighton decided a few years ago to start booking a profit immediately.

Leighton turned in a net profit of $114 million for the six months, which was within market expectations. One of the issues for investors is its gearing, which at 46 per cent is getting uncomfortably high. Given the company has $840 million of debt due within the next 12 months, it may have been more prudent to reduce its dividend payout.

But then again Leighton has a major shareholder, Hochtief, whose major shareholder, Spain’s ACS, has a mountain of debt and so a dividend payment is welcome.

Leighton has been through a lot in the past 18 months and Tyrwhitt says the company is trying to repair its reputation. It is selling non-core assets, cutting costs and ”resetting the dial on risk” after disastrous write-downs on major projects. It has a long way to go.

Adele Ferguson/Tim Colebatch will be speaking on Victoria at the Crossroads? on August 23-24. For details on the conference, go to

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