Russia upheaval may deliver LNG windfall for Woodside, Santos

Australian LNG producers are set to cash in as Russian turmoil creates fresh uncertainty in global energy markets.

Woodside’s Pluto LNG plant could be a beneficiary of the energy chaos engulfing Russia as international oil companies cut investments.

Woodside Petroleum and Santos could cash in as international energy majors pull out of Russian gas projects, with Australian producers in a strong position given nearly 10 per cent of global LNG demand could be in peril, Credit Suisse says.

Russia accounts for 8 per cent of the world’s LNG supplies and 11 per cent of forecast demand by 2030, and the exit of BP, Shell and Equinor from the country could lead to a rapid deterioration in output and curtail planned projects as investment dwindles.

Prices have also jumped, with Brent crude surging above $US110 a barrel for the first time since 2014, shrugging off a move by the International Energy Agency to make emergency stockpiles available to the market. LNG prices are also soaring given growing uncertainty over exports from Russia, the world’s fourth-largest exporter of the fuel.

Australia’s two biggest LNG producers – Woodside and Santos – could profit from stronger earnings for production while also boosting market interest in their respective equity selldowns and increasing their appetite to develop new growth projects to meet demand, the broker said.

The Russia situation “could present material upside to LNG supply and demand fundamentals benefiting Woodside and Santos, both in terms of pricing, asset selldowns and appetite to develop new growth projects,” Credit ­Suisse analyst Saul Kavonic said.

Woodside’s selldowns at Scarborough in Western Australia and Calypso in Trinidad & Tobago may gain traction, while Santos could benefit with its PNG LNG and Papua sales. “With only Qatar and the US presenting material supply growth options on the table near-term, we expect more capacity may need to be incentivised elsewhere,” Mr Kavonic said.

“More marginal LNG projects may even return again, such as Browse, Sunrise and the Darwin LNG expansion.”

Woodside may have 8 million tonnes of uncontracted LNG and Santos 3 million tonnes later this decade, Credit Suisse said.

An increase in the slope – representing an index of the LNG price to oil – to 15 per cent, from the 11-12 per cent prevailing number, would add 16 per cent to the broker’s Woodside valuation and 11 per cent to Santos.

Macquarie also predicted a “profit windfall” for energy producers from higher prices, saying that with oil at $US100 a barrel and LNG at $US30 per million British thermal units, it sees significant upside to valuations.

LNG prices have soared, with North Asia LNG futures now at almost 20 times the LNG price recorded in June 2020, the jump sparked by a looming battle for precious cargoes of spot supplies.

Asian buyers will face increasing competition from European utilities for LNG from North America after European gas prices lifted 40 per cent in recent days following Russia’s attack.

Woodside earnings could rise by 149 per cent, Santos by 113 per cent, Karoon up 98 per cent and Beach rising 49 per cent, according to Macquarie.

Woodside and Santos are only modestly hedged with “strong leverage” to spot prices.

“We have not yet seen major upward pressure on production costs, and therefore would expect the vast majority of price upside to flow through to earnings and cash flow,” Macquarie said.

The broker notes that while ­energy companies have been ­focused on cost cutting since the 2014 collapse in oil prices, “this cyclical upswing may see management teams increase the focus on maximising production – even if it comes with some rising unit costs, it will still be worthwhile at $US100 a barrel and $US30 spot LNG. There may be additional capital expenditure and operating expenditure allocated to sustaining work to maximise output from producing assets.”

However, Macquarie cautions that high energy prices could “accelerate the energy transition to lower carbon sources”, potentially crimping longer-term demand.

Woodside rose 5.9 per cent to $30.39, Santos gained 6.3 per cent to $7.72, Beach Energy lifted 4.2 per cent to $1.60 and Karoon increased 2.3 per cent to $2.17.