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Will the Nord Stream Pipeline closure benefit Woodside Energy shares?

The closure of the Nord Stream pipelines leaves Europe in a bind. The EU spent decades closing coal-fired power plants to go green and even labelled natural gas as green energy. Will Woodside benefit as the EU scrambles for gas?

Source: Bloomberg

After dismantling dozens of coal-fired and nuclear power plants, Europe discovered that renewable energy wasn’t replacing the mothballed power plants fast enough and became heavily dependent on imported natural gas, largely from Russia, through the two Nord Stream pipelines.

However, Russia’s invasion of Ukraine and an explosion at a US LNG terminal created havoc in the global LNG market. While Russia retained the leverage of closing or opening the Nord Stream pipelines, this chaos appeared to be temporary. However, what now appears to be a permanent closure could result in a tight LNG market and higher prices for years rather than months.

Europe abandoned nuclear power and coal

After the 1986 Chernobyl nuclear disaster, Europe fell out of love with nuclear energy and began shutting down nuclear power plants.

Germany, for example, has shut down 31 nuclear power plants since 1986 and has just three left in operation. Notably, the country shut down two reactors in December last year.

Meanwhile, the German government is paying coal-fired power stations to close to meet its greenhouse gas emissions targets. Last year, the giant 1,600 MW Moorburg Power Station in Hamburg permanently closed just six years after it commenced operations, after earlier successfully participating in a government decommissioning tender.

The rest of Europe is similarly closing down power stations to meet their 2030 greenhouse gas emission targets.

Green energy isn’t meeting expectations

At first glance, Germany appears to be going green. Installed solar capacity of 58.4 GW now exceeds the combined coal (44 GW) and nuclear capacity (8.1 GW).

However, it produced just 6.3% of Germany’s electricity in the first quarter of this year. 31.5% came from coal. Now that summer is over in Europe and the sun shines less each day, Europe needs energy it can turn on and off.

Natural gas is now ‘green’

Earlier this month, the European Commission designated natural gas as ‘green’ so that it can become an integral part of Europe’s green energy mix. This may give energy companies more confidence to invest in gas-fired power stations.

Consequently, this could lead to higher natural gas imports. However, imports have been severely disrupted.

There’s a global shortage of natural gas

After the invasion of Ukraine, Russia reduced natural gas exports to Europe as part of a tit-for-tat trade embargo. European leaders subsequently agreed to cut their dependence on Russian gas by two-thirds by the end of the year. Now that events have overtaken them, Europe needs to import record amounts of natural gas.

But that may require significant shipments of LNG from the Middle East and the US.

The US has several LNG terminals on the east coast that serve Europe. However, Freeport LNG’s Texas plant halted operations in June following an explosion and fire at the plant.

Freeport expects to resume operations in November this year. This single facility accounts for about 20% of US LNG export capacity.

LNG prices are still climbing

According to World Bank data, the benchmark LNG Japan price climbed to a record US$20.15/MMBtu (million British thermal units) in August, the highest since records began in 1977. This is more than double the average price for 2020-21 of US$9.54.

Even these high prices are dwarfed by the 9 October spot pipeline price in Europe of US$49.53 – up more than 10x from US$4.89 in October 2020.

Woodside Energy may be poised to reap the benefit

Woodside Petroleum Ltd is Australia’s largest natural gas producer, with 87% of its first quarter revenue coming from LNG .

Woodside Energy shares have outperformed the market over the past year, up 16% as of 14 October, compared to 11 October 2021. However, this pales in comparison to the price of LNG, which soared 89.7% between September 2021 and September 2022.

It seems that the market may expect a pullback in natural gas prices. Otherwise, Woodside Energy shares would potentially be trading higher than 6.65 times earnings and a dividend yield of 9.01%.
If the above analysis and assumptions are correct, and if the market accepts that natural gas prices – LNG in particular – are potentially going to be high for the next several years, Woodside shares could rise.

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