Australia | Nov 26 2020
APA Group will go it alone in the construction of a new gas pipeline in Western Australia's goldfields, having assessed significant demand exists from a range of mineral producers
-Interconnected nature provides for long-term value
-Lack of contracts a key risk
-But manageable given cash funding
By Eva Brocklehurst
APA Group ((APA)) is forging ahead with a long-held ambition for an interconnected Western Australian gas grid. The company plans to construct a new $460m gas pipeline, the Northern Goldfields Interconnect (NGI), that will link the goldfields with the Perth Basin and the Dampier Bunbury Pipeline.
APA does not typically undertake capital projects without a take-or-pay haulage contract, with counterparties also underwriting the return. This is the first time, of which Morgans is aware, that it is proceeding with construction prior to revenue contracts being secured.
APA expects to have an initial 25% of capacity firmly under its belt and long-term contracts in place by the time the pipeline is completed in 2022, and anticipates significant additional demand from a variety of mineral producers.
Providing 80TJ/d of capacity, the new pipeline will be superior to what would be achieved with equivalent expenditure on an expansion of the current goldfields pipeline. It will provide several options from where customers can source their gas.
Morgans considers the interconnected nature of the pipeline provides long-term value beyond the finite life of a pipeline that would be dedicated to a single mine site or power generation investment.
CLSA is concerned the company will shoulder greater risk this time around as there are no contracts as yet, and it is relying on new gold mining projects to support the expansion of the region.
The broker estimates the pipeline could generate operating earnings (EBITDA) of more than $44m, noting APA will fund the build from its $1.2bn cash till. CLSA eases back its longer-term estimated return on investment for similar growth projects.
The fact the pipeline is principally uncontracted poses a risk, Macquarie acknowledges, noting mine development is occurring independent of the availability of gas. Still the project is a positive given its cash funding and will support additional opportunities for growth and expansion in the region. Hence, the broker concludes the risk is relatively small for APA.