Peter Strachan is the author of subscription-based analyst brief StockAnalysis, further information can be found at Stockanalysis.com.au
One disturbing aspect of Western Australia's gas supply crisis is the fragile nature of essential infrastructure once it is in private hands.
Efficient operation of transport, gas, water and power infrastructure is central to the economic wellbeing of our economy. Clearly, these assets deliver a wider benefit to the community than can be measured purely by the profit generated by the provider.
When 'propeller heads' from private equity step into 'buy' assets like Alinta or Qantas then inevitably, the business structure becomes more fragile as they are geared up while operational redundancy capability is pared to the bone.
Imagine what state Qantas would have been in if the big money boys had won the day.
Now Western Australians are living with increased uncertainty surrounding gas and power networks because of unsustainable debt covenants placed on the new owners of the old Alinta assets.
Let that be a lesson to us all. We should be very careful with the ownership and operation of critical infrastructure assets. If they fail, the costs to the rest of the community far outweigh the losses to the utility itself.
The Apache Energy-led Varanus Island gas plants process gas from the Harriet Joint Venture at rates of around 120 terajoules (Tj) per day, plus gas from Santos' 45 per cent owned John Brookes field from the East Spar JV at rates of around 180Tj/day. Clearly the gas producers will be big losers from this disruption, but the really big losses will occur in industry, which has become completely reliant on gas to fire boilers, produce electricity and heat furnaces, among many other uses.
In the short term, the winners will be those companies that have dual fuel, though using diesel at current prices will lift fuel costs by a factor of four or five times, which in many cases might push profit margins out the window.
Bio-diesel producer Australian Renewable Fuels has gained a big order from the mining sector to produce fuel, which will most likely be used to run power generation. Bio-fuel producers will gain in stature as an alternative fuel following this gas shortage.
Others seeing short-term gain will be those folks supplying maintenance and pipeline construction work, including heat treatment, such as Monadelphous and RCR Tomlinson. Companies are scrambling to bring forward maintenance plans, but this is not so simple. Maintenance requires long planning times for logistics to organise people, spares and consumables, so in many cases it may take more than just a few phone calls to organise. One thing is for sure and that is we will see a huge jump in unemployed people in WA during June and into July.
In the longer term, companies planning to look for gas closer to Perth will also come under the spotlight and gain support. Empire Oil plans to test gas fields near Gingin later this year, while Transerv has changed focus to earn up to a 15 per cent interest in a large, tight gas project at the Warro gas field further north, closer to Dongara, with its partner. Unlisted Latent Petroleum and alumina producer Alcoa have formed a joint venture to evaluate this challenging drill and fracc program, with plans to begin work during the September quarter. Both projects are close to existing transport infrastructure and close to the main markets around Perth, where contract gas prices have been recently set at around $7/Gj but where you could probably sell up to 100Tj/day at $30/Gj today, if you had supply.
Aviva Corporation, which is planning to build a 400 megawatt coal-fired power plant near Eneabba, will also gain as its project offers to decentralise power production from Perth and Collie, while diversifying supply with more coal.
Longer term, Perth and the whole state needs to develop more redundancy in its power supply to cope with exogenous events such as unplanned maintenance or natural disasters which might knock out part of the system. There should be ongoing work to expand and protect the vital DBNGP line bringing gas from the north and there must be added effort to bring new fields on line, especially in the Perth Basin, where the Parmelia pipeline provides a secondary supply route. Even gas from the Whicher Range field, near Dunsborough, should not be ruled out, though given the issues surrounding its tight reservoirs, encouraging more than five to 10 Tj/day might prove to be a challenge, but worth the effort at today's gas price.
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For some time there has been debate about where the US market might head. Has it found a base and will now head back to 2007 highs or is this recent rise just a bear trap? Given reports of very high volumes of cash sitting on the sidelines and also record levels of short positioning on the US stock markets, there have been mixed predictions. Normally, a high level of short positions coincides with trading bottoms on the market. Generally, when the consensus is totally negative, that is the time to buy. Additionally, a high level of cash sitting on the sidelines has also been seen as a bullish factor, since there appears to be plenty of cash waiting to enter the market.
As is turns out, the negative sentiment, which is keeping funds out of the market and many Wall Street traders short, does appear to have been the correct stance. A rising price for oil and other basic industrial raw materials, along with ongoing worsening of the US credit crisis and wobbles on the global political scene (read Middle East), has set the Dow Index on a downward course.
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Recent reports by Mortgage Bankers Association out of the US indicate that nearly one in 10 American homeowners with a mortgage faced foreclosure or fell behind in payments in the first three months of 2008. Both the rate of new foreclosures and late payments surged to the highest level since 1979.
Of the 45 million home loans included in the survey, 6.35 per cent were at least one payment overdue, up from 5.82 per cent for the previous quarter. Foreclosure proceedings began on 0.99 per cent of loans, up from 0.83 per cent in the previous quarter. Overall the percentage of loans in foreclosure reached 2.47 per cent in the first quarter, a lift from 2.04 per cent at the end of December 2007.
The drop in home prices which has affected a broad swath of America's housing market has left many homeowners with negative equity in their own homes. The problems are worst for homeowners who took out sub-prime loans.
The US financial system is in deep trouble. Glib comments that the worst has passed because the US Fed stood up to back big banks facing bankruptcy and is continuing to print money while the government acts like Santa Claus, giving out tax rebates hand over fist, gloss over the underlying malaise, which is not getting better and is unlikely to bottom out before the December quarter.
A few weeks ago, I outlined the next big issue in the US with the huge US auto finance scam. Rising fuel prices are likely to spur millions of US motorists to drive their cars back to the sales lot and simply deposit their keys. With one in 40 mortgages now in foreclosure and one in 10 facing the prospect, how will they continue to pay off their car loans? Watch this space to see how it evolves during June and July. I have no idea what will happen, but it has the making of a secondary financial crisis.
- Peter Strachan is the author of subscription-based analyst brief StockAnalysis, further information can be found at Stockanalysis.com.au
