Australian Energy Stocks Take A Big Hit

In Australia, all the action is on the ground. Energy stocks were hit big time in Friday’s trade. Santos [ASX:STO] finished down a whopping 13%. The ‘defensive’ Origin Energy [ASX:ORG] fell 7%.

Both of these companies have major LNG projects on the go. As I pointed out on Friday, taking investment costs into account, these projects aren’t looking so good with oil prices at current levels.

Let me put the situation into perspective for you. Last week, the Bureau of Resources and Energy Economics published their six monthly update on major resource and energy projects. Here’s an excerpt from the introduction, my emphasis included:

As at October, there were 44 projects at the Committed Stage with a combined value of $228 billion compared with 48 projects with a combined value of $229 billion six months earlier. LNG projects continue to drive resource and energy investment in Australia, accounting for around 87 per cent of the value of committed projects.’

So there is nearly $200 billion of investment underway in Australia right now devoted to the production of LNG. And a lot of it is going to hit the market next year, which won’t help the price environment at all. That means returns on capital for these projects will be much lower than projected.

I know these projects are long term…they’re going to produce for 20 plus years. But in the short term, the low price environment will do some major share price damage.

A company’s intrinsic value is all about the returns it generates on shareholder capital. In the case of Australia’s big energy companies who have invested in LNG, these returns, in the short term at least, will be poor. No wonder share prices are taking a beating.

It’s a sector I wouldn’t want to be in for a while. Sure, you’ll probably see a rebound soon and at the end of the price rout there will be some bargains, but for now you’re better off standing aside and waiting to see where the dust settles.


Greg Canavan+
For Markets and Money

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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