AGL Energy Ltd (ASX:AGL) has announced to its investors that it intends to gradually close down the exploration and production of natural gas assets. Citing that it will no longer be a core business for the company.
However according to AGL, there will be no change to AGL’s commercial or retail gas activities. AGL is confident that it has adequate gas for its residential and small business customers. Following the recent contract with the Gippsland Basin JV, along with the planned expansion of the Eastern Gas Pipeline. Moreover, incremental future gas requirements will likely be sourced from the southern markets.
The FY16 cash impact on their decision, factoring out the potential sale of assets, is expected to be less than $10 million. With the costs relating to rehabilitation, redundancy, and other associated costs.
AGL attributes this decision to the ongoing volatility in commodities, along with long development lead times.
Managing Director and CEO, Andy Vesey said “AGL will focus on its core competencies, transforming the business to capitalise on the evolution occurring in the energy sector and to meet tis customers rapidly changing needs and expectations.”
As a result of this decision, AGL expects to recognise an impairment charge of $640 million after tax ($795 million before tax) against the carrying value of its gas exploration and production asset. Whislt including an increase in rehabilitation provisions.
The impairment comes from a range of their assets within Australia. Due in part to unfavourable market conditions, and disappointing gas flow data. This includes their Moranbah, Silver Springs and Spring Gully assets in Queensland. Along with the Gloucester Gas Project, and Camden Gas Project in South West Sydney, which will be ceasing production in 2023.
Furthermore, this charge will be identified as a significant item within the financial results for the 6 months ended 31st December 2015. According to AGL, the impairment will have a relatively insignificant impact on FY16 underlying profit.
AGL gained around 0.9% upon opening, as at 10:10 AM (AEDT). Despite the rather volatile environment they are currently in, with competitors such as Origin Energy Ltd (ASX:ORG) down almost 20% for the year, AGL has managed to return approximately 2.4% in 2016.
Author: Ben Khouri
Feb 04, 2016
Ben Khouri is a financial editor for Wise-Owl with a particular focus on the top ASX 300 companies. Having a vast background in economics and finance, Ben provides financial commentary & analysis as well as global market updates, which guide investors in devising investment strategies. Ben specialises in analysing economic data and global events from around the world and examines the impacts they have on the major equity markets.