On LNG, Pathology And Recruitment Stocks

This story features SANTOS LIMITED, and other companies. For more info SHARE ANALYSIS: STO

By Greg Peel

It's a buyers market out there in the global LNG space, notes Citi, which is not good news for Australian LNG and CSM LNG companies looking to sign much needed heads of agreement (HOA) and move to final investment decisions (FID).

FNArena has long been reporting on the potential for a global glut of LNG supply ahead. While various offshore Western Australian LNG projects such as Woodside's ((WPL)) Pluto and the mighty Gorgon are attempting to ramp up on one side of the country, Queensland coal seam methane projects such as Santos' ((STO)) Gladstone and Origin Energy's ((ORG)) Asia Pacific are attempting to ramp up on the other. And then there's PNG LNG, on which Oil Search's ((OSH)) future is based.

For these projects to move to production, funding is required for the high levels of capex involved. This must come from either HOAs on long-term offtake contracts being signed with Asian customers, or equity being injected by either customers or global Big Oil, or both.

The good news, says Citi, is that the buyers are still out there. Customers such as Kogas, Sinopec and PetroVietnam are actively looking to secure supply. The bad news is that the ball is in the buyers' court. Successive contract prices have begun to fall against regular benchmark oil parity pricing. Qatar in particular has lowered its price.

Qatar is the global swing factor, as it could readily satisfy all contracts tomorrow. But to do so would be to kill its own market, so Qatar plays an OPEC-esque game instead, selling only when it wants and not interfering in other suppliers' deals. In the meantime, the US is bursting with so much locally produced natural gas at present that the spot price has hardly moved from its GFC depths. And that's before US shale gas reaches its expected potential over the next five years.

Citi notes as a result of lower pricing, LNG players have been forced to give up more equity in projects as a sweetener. The analysts believe GLNG, Wheatstone, Prelude and possibly APLNG will sign HOA's this calendar year, but that Pluto-2, Browse, Sunrise, Ichthys and Curtis will not.

Citi had taken a break from covering Australian LNG stocks these past several months but is now back with some “reinitiations”. Woodside cops a Sell given higher capex and thus lower discounted cash flow forecasts than peers, with timing on less developed projects uncertain. Santos scores a Buy given GLNG looks like being close to securing a third party.

Oil Search also scores a Buy given PNG LNG has been significantly de-risked by reaching the FID stage, yet the stock still trades at a discount to a conservative discounted cash flow estimate.

If Australian LNG companies are sweating blood over the prospects for their costly projects, they can always have that tested at one of the 400-500 new pathology collection centres expected to spring up post deregulation. Deutsche Bank suggests the deregulation initiative will actually prove costly for listed pathology companies given collection centres will need to be built, but pathology demand will not suddenly increase in concert.

The good news, nevertheless, is that pathology demand is at least expected to return to “normal” levels post-GFC in FY11, an expectation supported by recent Medicare data.

It's been fun and games in the healthcare sector of late given huge profit downgrades offset by M&A activity. With Sonic Healthcare ((SHL)) having tanked last month, Deutsche has revised its estimates and decided the stock is trading close enough to the broker's new valuation to mean an upgrade from Sell to Hold.

Deutsche's rating for Primary Health Care ((PRY)) remains at Hold given improving medical centre numbers are offset by pathology cost pressures.

Not helping anyone at present is a return to concerns of global economic weakness. As a manifestation, listed recruitment companies are noticing that the strong growth rates in placements in the March quarter have stalled in the June quarter. Companies have again become reluctant to recruit until the clouds clear.

RBS has thus downgraded its earnings forecasts in the space. The analysts' FY10-11 estimates for Clarius Group ((CND)) fall 12-17% which is enough for a downgrade from Buy to Hold.

Talent2 International ((TWO)) comes off a bit better, with only a 6-10% forecast earnings reduction but also a downgrade to Hold. Given TWO participates in managed services (eg payroll) as well as recruitment (28% of earnings), RBS sees TWO as a better bet for those wishing to invest in the sector.

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