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AGL share price fall a warning for the LNG sector

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The AGL Energy Limited (ASX: AGL) share price fell on Thursday after a disappointing FY20 result. Moreover, this was worst day for the AGL share price since 2007. In summary, the company saw its annual profit fall by 22% and expects a further fall in earnings during 2021. Managing Director and Chief Executive Officer, Brett Redman, commented various times that the company was starting to run into headwinds, and that the COVID-19 pandemic had hastened their onset. 

What moved the AGL share price?

On the same day, Woodside Petroleum Limited (ASX: WPL) published a half year report with a net loss of ~US$4 billion. However, it only saw a fall in share price of less than 1% because of forewarning. In contrast, the AGL share price saw a drop of 9.5%. While the company’s profit after tax, of $816 million, was within guidance, it was close to the lower end. Moreover, yesterday we learned that ‘headwinds’ means a drop in underlying profit after tax to between $560 – $660 million. At best, this is a reduction of 19.1%, at worst a reduction of up to 31.4%. 

The company suffered through a pretty dramatic year. Specifically, it has had to deal with the impacts of bushfires and drought as well as the coronavirus pandemic. In addition, there was a forced, unplanned outage at AGL’s Loy Yang power station.

Lastly, the company has had to deal with a pandemic-related reduction in gas volumes, as well as a collapse in wholesale gas prices. AGL provides approximately 5% of New South Wales’ gas requirements via its Camden Gas Project. However, it also had to write down renewable assets as part of the Powering Australian Renewables Fund. This has been attributed to the combined impacts of grid congestion problems, and falling prices accelerated by COVID-19. This congestion is part of the convergence of issues that have led to lower wholesale energy prices.

While this is only a $14 million dollar write down, there are many companies having difficulties in the renewables sector. Additionally, it is also likely to impact the company’s future plans for 850 megawatts of grid scale batteries, as well as a further 350 megawatts in renewables for demand response assets.

Guidance for FY21

In relation to the drop in earnings for FY21, Mr Redman said “FY21 will be a year of considerable uncertainty as we navigate the COVID-19 pandemic and its economic impact. Market and operating headwinds to AGL’s margin from the maturing of lower cost gas supply contracts and sharp falls in wholesale prices for electricity and renewable energy certificates have accelerated as a result of the pandemic.”

Both of these issues will weigh down the AGL share price, and are linked to the coronavirus pandemic.  Furthermore, they are caused in part by the Saudi/Russian oil feud, renewable energy, as well as the incoming recession. Additionally, the company expects to see increased customer hardship, and potentially increased operating costs at AGL’s generation plant.

However, all is not lost. The company saw an increase in its users across both its energy business, and its phone and broadband business. In addition, it has made a recurring saving of $135 million due to systems implementation. 

Foolish takeaway

While the AGL share price displays many characteristics of a company under strong management, as evidenced by its cost reductions, I believe it is in very serious trouble. Its dominant issue is that gas hedging is coming to an end, resulting in lower prices. This is at exactly the same time as wholesale prices for gas have almost collapsed. The company’s diversification into the telecommunications industry remains mysterious. AGL has spoken several times about energy and data converging, but has yet to lay out a concrete plan.

One of the pillars of the company’s strategy is transformation. To me personally, it seems to be transforming into a structurally smaller company.

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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.

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