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Fallout from the Perfect Storm

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Fallout from the Perfect Storm

Despite Australia’s comparative advantage in natural gas reserves, domestic residents are likely to pay higher prices due to large-scale export contracts. AGL Energy warned about this perfect storm in 2013. Three years later, the storm has arrived, and the company is now feeling its effects.

AGL Energy (ASX: AGL) has acquired a higher than anticipated proportion of wholesale gas for the first quarter of FY17 from the spot market. The company has cited unusually high prices due to strong East Coast demand, and expects a negative impact on its pre-tax wholesale gas margin in the first quarter of FY17 of approximately $35 million.

Along with lower wholesale gas margins in Queensland, lower consumer market margins, and flat business customer margins, the total pre-tax contribution from the Energy Markets gas portfolio may be at least $100 million lower in FY17. While AGL anticipates earnings growth in FY17, we think the industry fundamentals will be difficult to change quickly (and we’re not alone).

Ben MacNevin is an Analyst with Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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