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Kogas looks to sell assets to cut debt and go upstream

As it plans to cut debt by selling off assets, NJ Watson looks at the South Korean gas firm's plans

Korea Gas Corporation (Kogas) is looking to divest assets in order to reduce its crippling debt levels and spend more on select upstream projects. In this uncertain gas market, that will be a more complicated task than it might first appear.

Once state-run firms had carte blanche to run up huge debts in a headlong rush to acquire overseas energy companies and assets. No longer.

On 10 October, the South Korean government unveiled a new energy development strategy that will force firms like Kogas, in which state entities own a 61% stake, to refrain from making costly mergers and acquisitions. Rather, they will have to focus on improving their finances in order to beef up their exploration abilities.

A key part of that will be reducing unsustainably high debt/equity ratios that were run up as a result of developing overseas projects. Under the plan mapped out by the energy ministry, Kogas' debt/equity ratio, which had ballooned from 228% in 2007 to 438% at the end of 2012, will be cut to 274% by 2017 and eventually 130%.

"It is our first priority to improve finances in order to reduce the company's debt/equity ratio," Kogas' new chief executive Jang Seok Hyo told Bloomberg earlier this year. "Without financial soundness, it won't be possible for us to achieve a long-term, sustainable growth, which includes securing supplies from overseas resource projects."

The plan is for Kogas to sell non-core assets acquired during a $6.1 billion splurge between 2008 and 2012, and improve the quality of its overseas projects.

Kogas report card

The headline deal during that time was the $608 million spent on a 15% stake in Australia's Gladstone liquefied natural gas (LNG) project in 2010. From the outset, Kogas indicated it wanted to offload up to two-thirds of that stake (the firm in 2012 said its investment in the $18.5bn project would be $1.3bn) and in February appointed Samsung Securities and Rothschild as advisers to look into the possible sale.

On  15 October, Jang said Kogas is also considering selling 5-10% of its 20% stake in the LNG Canada project. Jang said he expects to make concrete progress on the stake sale in early 2014, though cautioned that given its so-far unsuccessful efforts to sell part of that stake in Gladstone LNG, the timing for selling stakes in overseas assets "is not quite right" for that.

"It seems energy players are waiting for gas prices to fall further so that they can buy gas-developing projects at a bargain. We might have missed good opportunities to sell our assets," he was reported as saying.

Other underperforming overseas assets that Kogas is looking to sell include those owned by Canadian subsidiary Harvest Energy, acquired by the company in 2009, and its 10% interest in some blocks offshore East Timor, in which it has invested $31.9m since 2006.

As well as asset sales, Kogas is looking to change the way it purchases LNG. As the largest single buyer of LNG in the world - in 2012 it imported 35 million tonnes of the fuel - it believes it could increase its clout further and help lower buying prices on the Asian market by cooperating with smaller local players as well with Japanese companies. "Japan is a big LNG buyer. I don't think we need to compete against each other, which would only push up prices" By joining hands, we could be mutually beneficial," Jang said.

According to analysts at IHS Global Insight, joint procurement of LNG is an idea that has found increasing favour amongst Asian buyers, "as they have sought to increase their relative buying power and negotiate cheaper LNG prices, given that high demand from Japan has exerted strong upward pressure on Asian LNG since the March 2011 Fukushima disaster."

Kogas is facing higher prices from disgruntled suppliers around the world, who are smarting from the low prices agreed in contracts signed years ago.

On 8 October, sources told Bloomberg that Sakhalin Energy is seeking price increases under a contract first agreed with Kogas in 2005 and which is up for renegotiation next year.

And Yemen also began negotiations with Kogas in August with the aim of getting the Asian company to pay global market prices for its LNG by the end of this year. Yemen signed a 20-year LNG export contract with Kogas that paid an average price of just $317 per tonne for its LNG in July this year, compared with $793/t for Russian LNG and $952/t for Qatari LNG, IHS cited the latest South Korean customs data.

Kogas has also taken a step back from its Australian commitments, recently walking out on a heads of agreement over Chevron's Gorgon LNG project.

Jang also said that the company plans to sell shares to help improve its finances. Kogas said in August that it hopes to raise 700bn won ($628m) by issuing new shares. Given Kogas has a 2013 investment budget of about 6 trillion won, the 700bn won raised will account for 10-15% of Kogas' annual budget.

But Kogas is still making healthy profits. On 13 August, the company reported that during the first half of the year its operating profit rose by 10.6% from the year-earlier period to 1.059 trillion as sales increased 8.3% to 20.3 trillion due to increases in wholesale tariffs and sales volumes.

The company said it imported 21.53m tonnes of LNG in the first half of 2013 and it expects to sell more than its earlier estimate of 36.55m tonnes for the full year, which reflects a 3.6% rise from 2012 as demand for power surges. The LNG is sourced through 16 long-term and three mid-term contracts spread over 10 countries. Qatar is Kogas' largest LNG supplier . It is  expected to supply more than 13m tonnes of LNG to South Korean buyers in 2013, most of that to Kogas.

Kogas' main strength is that due to industrial development and strong economic growth, the domestic demand for LNG will continue increasing - consumption stood at 1.6 trillion cf in 2011, up more than 125% from 2001. However, the company will need to work hard to secure more direct access to supplies.

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