10-June-2020:  https://www.oilandgastoday.com.au/nsw-government-contests-csg-bill/

Oil and Gas News

NSW Government contests CSG bill (9-June-2020)

NSW Independent Justin Field has passed a coal seam gas (CSG) moratorium bill through the NSW Legislative Council, with the support of the Labor opposition; the Shooters, Fishers and Farmers Party and the Australian Greens.

However, the Liberal Government, alongside the Nationals, has rushed to defeat the bill, which aims to derail Santos’ Narrabri gas project.

The bill is proposing to ban the prospecting for, or the mining of CSG in NSW, and will now go before the Legislative Assembly.

Field said it was madness to put the state’s land and water at risk when the world was quickly moving to new and exciting alternatives in renewable energy.

“We have an opportunity in this place to take a different path. For that reason I am proud to introduce a bill that will place a moratorium on coal seam gas development across the state,” Field said.

Santos achieved an approvals milestone in April with the Narrabri gas project after being referred to the Independent Planning Commission (IPC) in NSW.

The NSW Department of Planning is set to complete its assessment report on the project and provide it to the IPC for consideration, which the IPC making a decision within 12 weeks of receiving the report.

Santos has outlined that the Narrabri project has the potential to supply enough natural gas to meet up to half of the demand in NSW.

However, Field added that “we do not need this project” and “we do not need it for gas supply and it will not reduce the price of gas” during a speech to the Legislative Council.

“All it will do is impact on land, water, communities and industries. By comparison, unconventional gas is expensive gas. Unconventional gas fields are high-cost, low-yield operations in comparison with conventional gas plants that are currently delivering for our domestic needs,” Field said.

“Unconventional gas, fracked gas, coal seam gas, shale gas – whatever you want to call it – takes a lot of infrastructure and hundreds of wells.”

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Disclosure:  I do not hold Santos (STO) shares, but I do hold shares in other gas producers such as WPL, SXY and COE.  I believe this bill has some merit but will be defeated in the NSW Lower House (the Legislative Assembly).  I don't see this as being too damaging for Santos, but it does underline the risks associated with CSG (Coal Seam Gas) projects, especially new ones. 

While the Morrison federal government is particularly supportive of natural gas as a transitional energy source (as we transition from fossil fuels to an eventual 100% renewable energy future) because natural gas is a far less polluting option (in terms of greenhouse gas produced when gas is used to produce electricity) than coal - natural gas is produced from different sources in different ways, and CSG is always going to be a contentious issue I think. 

Those energy (oil/gas) companies that produce their gas offshore or from arid or otherwise unproductive or undesirable areas of land (well away from prime farmland and towns/cities) are far more likely to have a smoother run and encounter less opposition, so are more likely (IMHO) to prove to be superior investments within the sector, all other things being equal.  Additionally, those energy companies that do NOT need to rely on contentious extraction methods that are thought to often result in environmental damage - will also have a smoother run and will also likely prove to be superior investments (all other things being equal) - in my humble opinion.

Record annual production at top end of upgraded guidance

• Record annual production of 89 mmboe, 18% above the prior year and at the top end of upgraded guidance provided in December

• Record quarterly production of 25.4 mmboe, 1% above the prior quarter

• Record quarterly sales volumes of 31.1 mmboe, 7% above the prior quarter

• Record annual sales volumes of 107.1 mmboe generated annual sales revenue of US$3.4 billion

• Fourth quarter sales revenue of US$922 million, up 16%, primarily due to stronger LNG sales volumes (up 23%) and prices (up 25%)

• Santos’ disciplined operating model continues to drive costs lower, with 2020 upstream unit production costs of ~US$8/boe at the lower end of the US$8.00-8.50/boe guidance range

Strong free cash flow and low breakeven oil price

Much of their supply is delivered via long term contracts - how much opportunity is there to benefit from rising LNG prices, other than what they sell into the spot market (couple barrels). Are their contracts fixed price?

Seems fairly valued otherwise

LNG price increased 14% over prior quarter. Sales volume up 9%, revenue up 15% on prior quarter. JCC and JKM prices up over quarter. Free cashflow of $1 billion USD (47c AUD per share) over Q3.

JCC price averaged $111 USD /bboe over Q3, so LNG price likely to soften over the next 2-3 quarters.

DISC - HELD

Key Takeaways:

1. Record revenue of $1.9 Billion USD
2. record production of 26 mmboe.
3. Record free cashflow of $865 M USD. That's free cashflow of $2.47 per share per annum.
4. Debt reduced to 26% of equity.
5. LNG revenue of $1.1 BN USD (58% of revenue).

Note: Most LNG contracts are lagging spot price. LNG sales price was $13.77 / mmBTU. this compares with the two pricing benchmarks:

a) Japan LNG (LCC) price of $18 / mmBTU.

b) JKM (Japan / Korean Marker) spot price of $25.67 / mmBTU.

There is significant upside in the LNG prices going forward, to the tune of around 20-30%, most of which will fall to the bottom line.

DISC - HELD

Notable, Santos was receiving $13.77 USD per mmBTU for LNG last quarter. They indicating an increasing proportion of spot pricing, with 13 of 60 cargoes selling at spot prices.

For those playing along at home, attached image shows the current LNG prices against the average price Santos earned for its LNG last quarter. Santos's LNG contract prices will move towards the spot price over time, and will likely increase spot shipemnts over time to exploit the high prices.

The question is, how long will LNG prices remain this high? Well this depends on the Ukraine war, and there is a possibility this war will have a lasting impact on supply - there are no certainties in geo-political conflict, but it is one risk, I think that it is definately non-zero. I will post my thoughts on this in a separate post.

DISC - I HOLD

prices for JCC (Japan Customs Cleared Crude) LNG price, and JKM (Japan Korean Marker) LNG prices:

0055 GMT - If Santos's sale of a 5% stake in the PNG LNG gas-export facility in Papua New Guinea fetches a price in line with investors' expectations then that would be a strong outcome, Macquarie says. Santos says it is in advanced talks with counterparties on a deal for the 5% equity interest, which Macquarie says could be worth US$1.3 billion. When combined with free cash flow, a deal would reduce Santos's gearing to 15% by the year end, Macquarie says in a note. "We cut our dividend expectations, reflecting our expectation all windfall cashflows above US$65/bbl will be paid out in form of buybacks in 2H of 2022e and 2023," says Macquarie, which rates Santos at outperform. (david.winning@wsj.com; @dwinningWSJ)

Europe will has become the marginal buyer of LNG, driving up JKM LNG spot prices. Currently, JKM sport price for LNG is about $48 USD/ MMBtu. This is up from $23 USD/ MMBtu in June.

Santos's spot cargo sales prices are JKM-linked, which means, as a result, spot price earned on Santos's spot prices are likely to double in Q3. Now, with oil prices remaining above the JCC contract price, we can assume the contract portion will remain relatively stable. Now, 10-20% of all sales are sport price typically. If one assumes the number is 15%, the average LNG price for Q3 will be at least 11% above Q2 prices.

STO 2022 EPS is likely to exceed $1.10 per share should LNG price remain elevated. tom line.

Europe will likely remain the marginal buyer for LNG through to 2023 as alternative NG supplies come online.