What: According to a report in Fairfax Media, the global head of commodities and structured trade finance at banking giant HSBC, Mr Jean-Francois Lambert has suggested that "weaker oil prices won't derail Australia's liquefied natural gas export boom."
So What: The views of Mr Lambert are a slither of good news for the embattled oil and gas sector which has witnessed a dramatic sell-off in the share prices of leading LNG players such as Origin Energy Ltd (ASX: ORG), Santos Ltd (ASX: STO) and Oil Search Limited (ASX: OSH). Over the past six months, share prices have declined 57%, 26% and 3% respectively – with Oil Search's share price boosted by a takeover bid.
Amongst the key insights provided by Mr Lambert included:
- that the oil price would be stuck in a range of US$45 to US$55 per barrel for the next few years
- that just like other commodities, the LNG industry would adapt to lower prices by "optimising production and lowering costs"
- that current market dynamics meant it would now take longer for LNG producers "to make a return on their investment"
Now What: Accurately predicting where commodity prices will settle is a difficult task, however, identifying the lowest cost producers within an industry sector is certainly achievable and in most circumstances the lowest cost producers will survive and potentially prosper after a period of adjustment.
While conservative investors may quite reasonably choose to completely avoid the energy sector, contrarian investors looking for value are likely to be drawn to the opportunities created by the harsh sell-off in oil and gas stocks. Certainly some key players have begun to see opportunities with energy giant Woodside Petroleum Limited (ASX: WPL) lobbing a bid for Oil Search and Santos receiving an approach from a potential acquirer which suggests value has emerged.
