As the coal dust settles on NSW state government's decision to limit coal seam gas (CSG) activities to at least 2 km outside urban areas, and implementing tougher checks on mines, the first casualty has emerged. On Wednesday Metgasco Limited (ASX: MEL), a Sydney-based CSG exploration and production company, announced the suspension of the company's Clarence Moreton exploration and develop program.
Despite the new regulations not being finalised yet Metgasco highlighted substantial uncertainty around the approval process as causing the development to be too inefficient to proceed with. The decision is a massive blow for both the company and investors who have committed nearly $100 million to the project over the last 10 years. The decision pushed Metgasco's share price down towards all-time lows of $0.07. The news will raise questions of other CSG explorers like Origin Energy (ASX: ORG).
Importantly for investors, it is a reminder of the huge and sudden impact regulatory changes can have on the companies we own, and how tough they can be to protect against. Cuts to government healthcare funding in both Australia and the US have had impacts on contracts held by companies including Fisher and Paykel Healthcare Limited (ASX: FPH) and Sonic Healthcare (ASX: SHL).
A more recent example is the government's media reform plan that would require potential mergers between media companies to first be blessed by a government bureaucrat to ensure they are in the public's best interest. With several media companies currently going through significant metamorphosis the reform is another potential stone to derail progress.
New reforms and regulations are being churned out all the time (I haven't even started on companies involved in liquor, tobacco and gambling…) but what protection is there for investors from policies that could change at any time?
The best protection investors can take is simple diversification across different industries, and ideally, different countries. Spreading the risk across industries will protect against the chances of one particular policy change causing long term damage to a company's source of earnings and to a personal portfolio. It's the old cliché of not putting all your eggs in one basket, and is as important as ever in an election year.
Foolish takeaway
For the most part regulation and policy changes aim to correct problems society faces. However in the case of Metgasco and others, the changes can have a negative impact on company earnings; a risk which can be diluted by holding a range of quality companies across different industries and even geographies.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Regan Pearson owns shares in Fisher & Paykel Healthcare Limited.
