The past month has seen the LNG spot price surge by ~15%. The spot price had fallen by 25% from 2 January until 15 April as demand fell in the wake of the COVID-19 pandemic. The sudden rise is due to lowering global supply for a couple of reasons.
First, producers are showing evidence of curtailing output, which stands to reason. If you have a limited supply to sell over time then you would want to get the best average price possible. Still, others are seeing supply drop as a direct consequence of social distancing protocols in order to keep workers safe.
Second, an explosion occurred at Enbridge’s Texas Eastern Natural Gas system in Kentucky on 4 May. This is a network of 9,100 miles of piping that stretches from Texas to New York and moves 20% of America’s natural gas. The company temporarily shut down all 3 major pipelines. Within days, most gas flows had been successfully rerouted.
Impacts to the S&P/ASX 200 Index (ASX: XJO)
In the 24 hour period from 4 May, the date of the incident, the following share prices spiked. Woodside Petroleum Limited (ASX: WPL) rose by 4.4%, Origin Energy Ltd (ASX: ORG) rose by 5.5%, Santos Ltd (ASX: STO) rose by 5% and Oil Search Limited (ASX: OSH) rose by 3.14%.
Woodside is not as exposed to a falling LNG spot price as only 80% of forecast 2020 production is on fixed-price contracts. Santos also has recently announced that 70% of its production is on fixed-price contracts.
However, both Oil Search and Origin Energy have recently reported revenue reductions due to the low regional gas price. Both of these companies stand to gain earnings due to the rising LNG price. Nevertheless, the market treats all oil and gas companies the same. As can be seen above, all saw an immediate uptick in their share prices on news of the Enbridge pipeline explosion.
Of these 2, I have been very impressed by the strategic vision of Origin Energy. The company has taken a range of far-reaching actions to reduce operational costs, both in the short and medium-term. Origin also has utility revenues as the nation’s number 1 gas retailer.
For those with a memory of the market in 2008, it is fair to say this time things are different. Unlike in 2008, this is not a liquidity crunch. Central banks the world over have poured money into bonds to keep interest rates down, allowing capital-intensive companies such as these to secure reasonably priced debt.
All of the oil and gas producers in the ASX energy sector are likely to see share prices rise as the LNG spot price rises. However, I believe Origin is the most likely to turn an LNG spot price surge into greater earnings.
The combination of disciplined cost-cutting, strategic action and defensive revenues mark Origin as a good investment in my view.
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Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.