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Will Buyers Emerge For AGL Energy’s Non Core Assets?

Australia | Jul 07 2015

This story features AGL ENERGY LIMITED. For more info SHARE ANALYSIS: AGL

-Extent of writedowns disappointing
-Asset sales difficult in current market
-Value in gas storage facilities

 

By Eva Brocklehurst

AGL Energy ((AGL))  is cleaning out its portfolio, sorting out assets it does not want and consigning them for sale. The company will write down over $600m in assets, including the Moranbah, Gloucester and Cooper projects. It will sell the undeveloped Hunter and North Camden CSG assets into the NSW government’s buy-back scheme. The interests in the Cooper oil project, Spring Gully and Moranbah are for sale.

AGL Energy has been signalling this spring clean for some time, realising it did not need to produce a large portion of the gas it sells. Macquarie believes this was recognised as early as last year when the assets of Moranbah were put up for sale. Most of the writedowns are non cash. Still, the broker questions whether the company can realise the value of Moranbah in a timely fashion. With no immediate sale, AGL Energy has had to renew depreciation of the asset. Of surprise to Macquarie is the plan to continue at Gloucester, although the project is unsaleable until it reaches final investment decision – now due in 2016 – and gas flows are proved up. Then, the company could re-consider owning the site.

In regards to Camden, existing production is unaffected. The asset has a life of six years and Macquarie expects the gas has been contracted to the merchant division at low historical prices plus CPI. The decision not to pursue PEL 2 (North Camden) and sell it back to the government avoids publicity surrounding fracking near homes and water catchments. Macquarie expected as much since the project has been suspended since FY13. AGL will retain gas storage at Silver Springs, Wallumbilla and Newcastle.

The extent of the impairments were a disappointment to JP Morgan as it brings the total upstream impairments since 2013 to $1.2bn. The broker also observed management was reluctant to provide firm expectations for flow rates at Gloucester until further production data becomes available. The onerous contract provision at Moranbah – $262m associated with gas transmission and power generation – was also disappointing but the broker welcomes the unchanged profit guidance for FY15. This is expected at the upper end of a $575-635m range.

Deutsche Bank welcomes the company’s decision not to tie up large amounts of capital in upstream gas projects with uncertain value outcomes. The broker believes the company should continue to allocate capital in areas where it has the greatest competitive advantage, namely its utility business. Electricity generation has been stronger in NSW with some cold weather at the end of June and pricing better than brokers expected. Queensland demand improved in the June quarter and the declines in Victoria and South Australia eased substantially. Wind generation continues to lose money although the losses are subsiding. Operations at Bayswater and Liddel coal-fired power stations have improved, with generation up 34% in June. 

Citi notes the market ascribes little value for the upstream gas and therefore downside risk is limited. The material assets are storage and the Gloucester project, if this value can be unlocked. The broker believes the company is making the best of a tough environment, with east coast gas markets oversupplied out to the 2020s making surplus assets hard to sell. Gloucester has survived divestment on this basis, in the broker’s opinion, with a large amount of political capital already invested in the project. Similarly, the company has had no success with evaluating a sale process in the Bowen Basin (Moranbah). Citi suspects the uncertainty over the Arrow LNG JV development plans makes a sale of this asset very difficult.

The retention of Newcastle and Silver Springs is considered prudent. Citi believes storage will become increasingly valuable, with volatility in gas markets likely to persist for many years. Citi has a Neutral rating and believes the company is well positioned to benefit from higher wholesale electricity prices. Nevertheless, the stock is fair value while delivery of predictable earnings and capital returns could support a continued re-rating.

UBS takes a conservative stance on the company’s cost cutting initiatives. Maximising existing assets for cash may be what investors want but the broker notes the price/earnings ratio will fall, particularly as de-carbonisation pressures increase. The broker does envisage around $170m in upside in FY18 from re-priced aluminium contracts but a likely reduction of $150m from higher priced gas input costs and lower high-margin sales from FY18. UBS retains a Neutral rating.

FNArena’s database has two Buy ratings, four Hold and one Sell. Macquarie is restricted on valuing the stock at present. The consensus target is $16.31, suggesting 3.1% upside to the last share price.
 

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