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Santos, Origin, Oil Search, Woodside: Gas outlook paints a rosy picture

AGL Energy’s (ASX: AGK) boss Michael Fraser has, according to a report in The Australian newspaper, warned that gas prices on the East coast of Australia could reach $10 per gigajoule as liquefied natural gas (LNG) is exported into higher priced Asian markets, leaving Australian-based power generators and industrial users struggling to compete with foreign buyers.

It’s a concern which has been echoed by a number of industrial users including Bluescope Steel (ASX: BSL) and Incitec Pivot (ASX: IPL), both of whom are members of lobby group Manufacturing Australia.

Mr Fraser’s warnings come as the Sydney Morning Herald also reports that demand for Australian LNG is set to surge. The SMH reports that research conducted by the National Bureau of Asian Research in the USA suggests China will be inclined to source its gas supplies from Australia and Canada ahead of the USA due to strategic concerns over reliance on the USA for energy supplies.

Both reports paint a rosy picture for Australia’s major listed gas producers. An outlook of higher prices and heightened demand bode well for Santos (ASX: STO), Origin Energy (ASX: ORG), Oil Search (ASX: OSH) and Woodside (ASX: WPL) and their respective LNG projects which are expected to experience significant ramp-up in production volumes over the next few years.

Foolish takeaway

The past 12 months has seen the share prices of Woodside and Oil Search increase by roughly 15% which is less than the 21.5% return achieved by the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO). Meanwhile Santos’ shares have rallied 33% and Origin’s share price is up 38%.

The market is well aware of the step-change expected to occur in the earnings of these four producers as their respective LNG projects ramp-up to full production. For investors the major question mark hanging over valuing each of these stocks is what the average gas price will be in the future?

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Motley Fool contributor Tim McArthur owns shares in Origin Energy.

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