Oil price weakness fuels LNG sell-off

Investors have dumped Australian LNG stocks ahead of earnings ­releases this week.

Santos has felt the brunt of the sell-off in LNG.

Investors have dumped Australian LNG stocks ahead of earnings ­releases this week as oil price sentiment slumps in the face of strong supply, with Australia’s next LNG exporter, Santos, feeling the brunt of the sell-off because of concerns it may need to raise equity.

The ASX stocks exposed in a big way to Australian LNG — Woodside Petroleum, Origin Energy and Santos — report this week, with chief executives facing investors as the oil futures, to which LNG prices are linked, show no signs of rebounding.

Last week, the International Energy Agency underlined concerns facing investors when it said that if OPEC supply remained flat, a projected global oil oversupply would persist through the next half of 2016. And this is not even factoring in potential higher Iranian output after the recent lifting of nuclear sanctions.

The IEA noted global demand was increasing. But its view of the extent of the supply overhang, which has not been clearly laid out in its previous reports, has led to a glass-half-empty view from most analysts.

“Using the IEA’s update, the global oil market is unlikely to ­balance until the fourth quarter of 2016 and even then, balances are unlikely to reach seasonal normal levels,” Macquarie analysts said in a note to clients on Friday.

“We believe it will be difficult for crude prices to sustain any fundamentally driven rallies for the balance of the year and potentially through the first half of 2016.”

Santos shares were hammered on Friday as concerns grew that the company is close to announcing an equity raising to shore up its balance sheet and credit rating in the face of the lower projected cashflow that lower oil prices imply for its $US18.5 billion Gladstone LNG project (due to start next month).

The stock fell 59c, or 9 per cent, to an 11-year low of $5.99 on ­Friday, mystifying most market participants who ended up laying the blame on speculation of an ­equity raising. Origin shares fell 4.5 per cent to a new seven-year low of $9.67, while Woodside, who has no LNG plants under construction and less debt than the other two LNG stocks, fell 3.6 per cent to a seven-month low of $32.84.

After the market closed, Santos issued a statement to the media that implied it was not going to raise equity but was not definitive.

“We note the fall in our share price today along with other energy stocks, however we remain confident in the company’s outlook and have more than $2bn in available liquidity,” Santos said.

“Santos has and continues to take positive steps to strengthen the company’s operating position in the lower oil price environment. Year-to-date capital expenditure is more than 50 per cent below 2014 levels and our production costs for the first half are tracking below guidance.” Brent oil futures, the European benchmark, were trading at just under $US50 a ­barrel on Friday afternoon, while the US benchmark, which is lower because of a shale oil glut, was close to $US42, a six-year low.

Analysts are divided on whether Santos needs to, or should, raise equity.

Credit Suisse analyst Mark Samter, who has been calling for the company to issue shares reduce its debt load for some time, says both Santos and Origin should raise equities.

“Both could offer meaningful value if equity was getting the ­protection it deserves, until then no share price can really get us excited,” he said in a report last week.

But Citi analyst Dale Koenders said the Santos balance sheet could survive.

“We continue to believe the company does not need to resort to an equity raise, based on our modelling of credit metrics and sufficient liquidity ahead of GLNG,” Mr Koenders said in a ­report earlier this month.

Woodside reports on Wednesday, Origin on Thursday and Santos on Friday.