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Summary
We see growing amounts of LNG causing increasingly volatile and,
relative to crude oil, higher gas prices. Stocks on which we have
Overweight ratings that should benefit from these trends are, we
believe, BP (on which we have raised our target price to 685p from
675p and upgraded from Neutral), JKX (initiating coverage with a target
price of 580p, with a volatility indicator), Gazprom (target price USD81)
and ONGC (lowering our price target to INR1,470 from INR1,520).
LNG agent of change
Volatility to increase
We believe that LNG (liquefied natural gas) will make up a material proportion of incremental supplies to
the US, UK and Asian gas markets. But LNG plants have a flat (base-load) production profile. Trying to
match this to markets with pronounced seasonal patterns is a recipe for increased volatility, in our view.
Markets beginning to converge
We also expect LNG to drive convergence between different markets, something that has become more
evident this year. LNG has created a link between the various markets during peak demand periods. This
spring, gas prices in the UK and US have risen counter-seasonally due to price rises in the oil linked
markets of Asia and Europe. During mid-2007, spot gas prices found support from coal prices, which
have since risen steadily, raising the support level for gas. Strong demand for gas during early 2008, has
pushed spot prices up to near parity with heavy fuel oil prices. If increased LNG does lead to greater
volatility, it is possible that gas prices could move to heating oil parity during periods of peak demand.
This would imply a near doubling of prices from current levels
Deregulation ahead
Gas markets in many parts of the world are still controlled by governments. But sharply rising energy
costs are increasing the pressure for price increases. This process will be gradual given the shock that
sharp price rises can cause to economies and domestic consumers. But the process is already underway in
several markets including Russia, Romania, Argentina and Ukraine.
Upgraded assumptions for UK and US gas prices
We have upgraded our forecasts for our 2008, 2009, and 2010 assumptions for US gas prices to USD9.3
(USD8.4), USD9.5 (USD8.0) and USD8.8 (USD8.0) per MMBtu. Our UK gas price assumptions increase
to 50p (48p), 48p (43p) and 45p (40p) per therm. These prices are below those in the spot market: the US
market is signalling prices of around USD11 per MMBtu in 2010e, for example. However, our 2010
assumptions are consistent with our long term oil price of USD60/bbl, which represents our view of the
marginal cost of unconventional oil supplies. We also include a price deck based on a long term Brent
price of USD130/bbl, which is within the USD120-150/bbl band used by our economists for their 2008
and 2009 economic forecasts.
Potential beneficiaries
On the upstream side, we see two classes of potential beneficiaries, those with exposure to markets where
gas prices have been competing with coal and those with exposure to regulated markets that are in the
process of pushing through price increases. We also believe that unregulated storage assets will become
more sought after as a result of increased price volatility.
US gas plays
Our preference in this category would be BP (OW from Neutral, TP increased to 685p from 675p), the
US’s largest gas producer. It also has exposure to low-priced gas production in Trinidad and Argentina
which could see upward pressure in the medium term. We also upgrade BG Group to Neutral from
Underweight given its exposure to US gas and ability to arbitrage LNG cargoes between markets. Our
target price rises to 1345p from 1280p.
Regulated markets
Our preferences in this category are Gazprom (OW, TP USD81), JKX (initiation of coverage at OW (V),
TP 580p) and ONGC (OW, TP lowered from INR1,520 to INR1,470). One attraction of these stocks is
that much of their gas production should see rising prices even in a flat or falling oil price environment.
目录
Summary 1
Potential beneficiaries 2
Step on the gas 5
LNG: agent of change 5
Gas fundamentals 7
Disparate markets 12
Price signals 16
Gas versus oil 20
Gas versus Oil 20
European companies 23
Valuations & target prices 32
Top picks 32
Changes in target prices and ratings 33
European valuations 33
Cost of capital 34
Pricing assumptions 36
BG 38
Financials & valuation: 39
BP 40
Financials & valuation: 41
ENI 42
Financials & valuation: 43
OMV 44
Financials & valuation: 45
Repsol YPF 46
Financials & valuation: 47
Royal Dutch Shell 48
Financials & valuation: 49
Statoil 50
Financials & valuation: 51
Total 52
Financials & valuation: 53
JKX 54
Financials & valuation: 58
Venture Petroleum 59
Financials & valuation: 63
Gazprom 64
Financials & valuation: 66
Novatek 67
Financials & valuation: 69
ONGC 70
Financials & valuation: 72
Reliance Industries (RIL) 73
Financials & valuation: 75
Disclosure appendix 77
Disclaimer 80
Contents
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