Investors are fretting over a crash in the equity market but the real crash could be in the energy sector as the plunge in the oil price threatens to put $200 billion worth of liquefied natural gas (LNG) projects under water.
Some analysts are predicting that LNG prices will fall a further 25% in the coming months to $US6 per million British thermal units (MBTU), which will put it on par with iron ore and coal as the worst-performing commodity in recent years.
The LNG price has already shed around 32% in the past 12 months and the gloomy outlook is fueled by weakening demand and growing supply with Australia's export capacity tipped to triple by 2020.
The International Energy Agency (IEA) is adding fuel to the fire by warning that even if the oil price was to bounce back to average $US60 a barrel over the next few years, six mammoth Australian LNG projects will still struggle to breakeven, as reported by the Australian Financial Review.
The Brent crude oil price, which is used to benchmark LNG prices in Asia, fell 0.6% to $US49.31 a barrel on Friday – taking its one-year loss to over 50%.
Gas from these plants is sold on contract, but benchmarked to the Brent oil price with a change in the price of crude impacting on LNG prices three to six months down the track.
The pain to local gas producers is well documented but there's growing speculation among traders that the once high flying Liquefied Natural Gas Ltd (ASX: LNG) could be increasingly targeted by short-sellers.
The mid-cap company has been a market darling because it developed technology that can make uneconomic smaller gas reserves financially viable. But if the world is flushed with gas and the price is set for another painful down-leg, surely this will have an impact on the company.
Coming back to local gas producers though, the pain will not be evenly felt throughout the sector. Santos Ltd (ASX: STO) and Origin Energy Ltd (ASX: ORG) are probably most exposed to domestic LNG, with Santos just weeks away from starting up its $US18.5 billion ($26.7 billion) GLNG project, while Origin will begin producing gas from its adjacent $24.7 billion APLNG plant at the end of this calendar year.
Santos' big bet on GLNG is already hurting the company with its share price tanking 72% over the past year as it is forced to consider selling assets to pay down debt, although that has not stopped rumours that it needs to undertake a capital raising to strengthen its battered balance sheet.
Origin Energy is not faring much better with its share price slipping 52% in the past 12 months, compared with a 44% slide in the S&P/ASX 200 Energy (Index: ^AXEJ) (ASX: XEJ) index. At least Origin has a more diversified business as it is also an energy retailer.
Sector heavyweight Woodside Petroleum Limited (ASX: WPL) will have to weather the LNG storm too through its Wheatstone project in Western Australia, which is scheduled to start-up in the middle of 2014.
However, it is probably the best placed among the group as it has more time to wait for an oil price recovery and because of its cashed-up balance sheet.
In my opinion, Woodside and Oil Search Limited (ASX: OSH) are the best ways for long-term investors to gain leverage to any recovery in the oil and gas market.
