Energy companies: a safe haven or liability?

Global sharemarkets have been battered over the past three weeks as investors started to contemplate the longer term economic impacts of the corona virus.

Holding aside the eventual impacts of the virus itself, the impacts of government responses to try and contain the virus are more material from an investment perspective.

Given management of the virus is likely to continue for much of not all of 2020, the economic cost of containment is likely to have a varying effect on different sectors of the global and domestic economy.

Airlines and travel related industries are among the first and hardest hit, while some of the lower risk sectors emerging may include supermarkets, utilities and other non-traded goods sectors.

The energy sector now has two parallel threats to manage: the impact of the virus on demand for energy resources like oil and gas, and the strategic decision by Russia and Saudi Arabia to crash the price of oil in the face of softening global demand.

Oil prices fell by more than 30 per cent earlier this week to around $30 per barrel, taking LNG prices with them. Spot LNG prices in Japan fell to a record low US$3.40 MMBtu.

What this means for Australian energy companies depends on their exposure to these softening global demand and prices.

Hardest hit Australian energy stocks are gas developers Santos (down 39 per cent since February 20) and Woodside (-33 per cent), as they are negatively exposed to both softer demand in China and this week’s oil price shock.

Origin Energy (-25%) has also been hit hard, although this is moderated by the company’s domestic electricity generation and retail businesses. Softer gas prices is likely to flow through to softening domestic wholesale electricity prices.

AGL (-14%) doesn’t have the gas business exposure, so it’s share price fall suggests, at least in part, how the market values how softer gas prices will impact wholesale electricity prices. Infigen Energy (-25%) is a wind and gas generation business, and has been also impacted, even though the cost of its gas generation should be cheaper.

The two least affected business are regulated networks business Spark Infrastructure (-6%) and gas pipeline provider APA (-4%). Regulated revenues are about as safe as you can find in a bear market, reflected by their marginal losses compared to other energy sector plays.


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