The rally in oil at the start of this week was a sigh of relief for big oil producers. Finally commodities were breaking out of their trends. But it’s a smaller oil and gas producer, AWE Ltd [ASX:AWE], that is making headlines.
AWE’s share price rose more than 56% yesterday to close $0.565. The jump yesterday has now put AWE into positive territory for the year. Yet what caused AWE to achieve these returns might be a one off.
Source: Yahoo finance
The benefit of selling oil
AWE has agreed to sell its 10% working interest in Sugarloaf project to a US-based Carrier, Energy Partners II. AWE received $271 million for their 10% interest, with an additional $13 million to compensate for past drilling costs.
But it’s not the sale of the project that shareholders are happy about. It’s what AWE intends to do with the proceeds. The $271 million will go towards repaying AWE’s debt, substantially strengthening their balance sheet.
Net cash for AWE is also expected to increase. AWE is predicted to hold approximately $60 million in cash and cash equivalents by the anticipated closing data. Mr Bruce Clement, AWE’s CEO, said the sale was consistent with the company’s strategy. Divesting assets in order to roll over cash to developing projects is the name of the game for AWE.
‘Post the sale of Sugarloaf, AWE will continue to focus on maintaining a balanced and diverse portfolio with a range of gas assets,’ Clement said.
Yet the sale of Sugarloaf is just a one off occurrence. Its removing will effectively reduce AWE’s production and sales revenue. But it could be a longer term play. AWE might want to get out of oil, seeing no long term future. And instead make their money in gas.
Gas prices expected to rise
It could be a smart move for AWE to move into gas. The average natural gas price is expected to rise by 21% moving into 2016 and onto 2017. Early this year AWE also approved a new gas developing which is still in its first stage. But the Waitsia gas field could be promising to pay off big returns.
Production of the gas field is expected to commence in August of this year. And even though AWE is an Australian gas producer, they still haven’t as of yet become established. The Waitsia field, located in Western Australia, will give AWE an opportunity to solidify themselves as a low cost gas producer in WA.
So if gas prices are set to rise will AWE share price follow? It’s hard to tell. AWE’s share price has already come off almost 8% in trading today. Most likely those who bought in yesterday are selling off to crystallise their profits. This was to be expected.
Usually when price sensitive news is released the market over shoots the projected benefits. The encouraged buying leads to the stock becoming overvalued. And thus the company’s shares will trend towards their intrinsic value.
Whether AWE’s movements into gas production will pay off in the future is uncertain. It surely seems like a good idea. If gas prices are expected to increase in the short term then that’s where you want to be. It’s similar to BHP Billiton [ASX:BHP] aggressively moving into copper instead of iron ore or thermal coal. BHP made the move because long term fundamentals were in their favour.
And I’m sure AWE shareholders are hopping short term fundamentals for gas are in their favour also.
Junior Analyst, Money Morning
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