Following on from its decision to quit burning coal by 2050, AGL Energy Ltd (ASX: AGL) announced this morning it would act to close and sell off its gas exploration and production ventures.
The What:
As a result, AGL has impaired the value of its Queensland Moranbah, Silver Springs (except for the gas storage plant), and Spring Gully gas assets in order to facilitate a sale. Additionally, AGL will not proceed with its Gloucester Gas Project in New South Wales, and will cease production at the Camden Gas Project in 2023, 12 years earlier than expected.
The Gloucester project will be abandoned as AGL does not feel the economic returns from the project will justify capital expenditure of $1 billion. Total 'non-cash' impairments are expected to be around A$795m total across all assets before tax, or A$640m after tax.
Additionally, AGL expects to report a cash impact of under $10 million as a result of redundancy and rehabilitation costs associated with this move.
AGL will continue to sell gas to its residential and commercial customers and is confident it has sufficient supply as a result of recent contracts. Additional gas requirements will likely be sourced from southern gas markets.
So What?
It's a disappointing outcome for shareholders as 'non-cash' impairments likely reflect a significant chunk of real cash that was invested in a prior period. While exiting the market makes sense with gas prices so weak, it seems AGL picked the worst possible time in the commodity price cycle to make its move.
However, CEO Andy Vesey seems determined to give the company a clean slate with which to tackle the next phase of the electricity generation market – that of home electricity generation.
(Foolish analyst Mike King covers the risks to electricity companies like AGL in more depth here.)
Now What?
Quitting gas will save AGL a considerable amount in capital expenditure over the next decade or so, money that can be used to pay down debt or invest in new businesses, such as renewables. Mr Vesey said that AGL would focus on its core competencies and transform the business to capitalise on changes in the energy sector and customers' changing demands and expectations.
One positive I took away from the announcement, and others like it recently, was Mr Vesey's very long term vision. Whether he's right or wrong, it's rare to find a CEO willing to make decisions on issues 10, 20, or 30 years in advance. In a market governed by 3, 6, and 12 month reporting intervals, I believe Mr Vesey's willingness to think long-term is a plus for AGL shareholders – who are surely hoping he sticks around to see at least part of his plan to fruition.
Despite this, I do not find AGL Energy shares attractive at today's prices, as I believe there are many uncertainties that must be dealt with before investors can get a clearer picture of where Australia's electricity market is headed over the next decade or so. Home generation technology is expensive now, but past experience with other technologies shows that if the demand is there, prices can only come down. Time will tell.
