Woodside among LNG glut victims: JPM

JP MORGAN has singled out both Woodside Petroleum and Statoil as stocks at risk from an oversupplied LNG market.
Woodside among LNG glut victims: JPM Woodside among LNG glut victims: JPM Woodside among LNG glut victims: JPM Woodside among LNG glut victims: JPM Woodside among LNG glut victims: JPM

"Notwithstanding unexpected supply losses [Angola and Yemen LNG] and expected source gas exhaustion [Arun, Bontang and Kenai LNG], we see the global LNG market shifting to a multi-year surplus," JPM said in an industry report on June 7.

"This reflects large blocks of new capacity [Australia +62 million tonnes, US +67Mt] and softening demand trends in Asia, most notably China and South Korea in 2015."

The broker is expecting LNG spot prices to sit below "softer contract prices" as most contract deals adjust to lower oil prices - with JPM saying there can be a three to four month lag - as part of periodic renegotiations.

"As term buyers exercise contract flexibility to nominate to lower offtake volumes, LNG plants are likely to maintain utilisation given low marginal cash costs, pushing more volumes to the spot market," JPM warned.

In assessing how an oversupplied LNG market would play out, the analysts noted that Woodside was highly levered to the commodity.

"As operator of producing assets North West Shelf and Pluto and partner in the soon to be producing Wheatstone, Woodside is exposed to the continual cycle of contract resets and some spot volumes as well as seeking to place long-term volumes for the yet to be sanctioned Browse FLNG and Kitimat [projects]," JPM said.

"The power shift in LNG to buyers from vendors puts it at risk of price erosion for its near term production base - notwithstanding operational efficiencies - and further delays to monetising its vast gas resources."

Norwegian oil giant Statoil was deemed to be vulnerable even though it has "limited liquefaction capacity".

"Its gas business is exposed to the risk of Europe becoming the market of last resort for LNG and lending gas market.

"This could suppress EU hub gas prices, especially if Qatar adopts an OPEC-style ‘market share over price' led strategy in global LNG."

JPM additionally saw risks to LNG project-building international oil companies.

"Returns on invested capital will be lower than expected given the mismatch between super-high engineering, procurement and construction sunk costs and today's much lower oil and gas prices."