Investment Matters

What matters this week

This week was all about two companies - the CBA, and AGL Energy.

The "they just don't get it" award of the week goes to the CBA.  The Australian (4-Sep-17) is reporting the CBA is considering outsourcing crucial IT functions, possibly to India.  Not a good look and the timing is terrible.  Looks like the PR consultants aren't having any luck changing the company's culture either.

And to wrap up the CBA this week, it is becoming increasingly apparent that overseas regulators (e.g. CBA has a banking licence in the US) may take action in relation to the money laundering and counter terrorism issues.  Fines could be enormous.  This is as the apparent knowledge about the issues and the extent of issues within the bank becomes clearer, with the leak of an internal document.  This document apparently shows, among many things, the little, and in some case no, monitoring of suspect transactions across many CBA businesses.  CBA dismissed it as a "working document".  Hmmm.

On to AGL.  It gave the proverbial finger to Mr Turnbull this week.  After years of government bun-fighting, policy backflips and infighting (Coalition and Labor), the energy companies appear to have had enough.  Not committing to extending the operating life of the coal fired Liddell power station in NSW is a practical decision (it is ~50 years old in 2022).  It also reflects the reality of the rod that governments' have created for their own backs - why should companies have made (or make) multi billion dollar and multi decade commitments to create meaningful new significant capacity when there is no consistency - or in the Coalition's instance no credible policy at all - regarding carbon and energy policy.  Additionally though, perhaps there is a tad of grandstanding from the AGL CEO at the moment. 

If AGL does end up agreeing to sell Liddell to allow the Coalition government to band-aid fix the power shortage issues, you can bet they will get top dollar, for an asset that will need hundreds of millions of dollars of spending just to keep it operating, and they will handball all the cleanup and environment liabilities they should have had (costs could be in the $1 billion range).  This will then mark one of the first clear instances of taxpayers being screwed because of governments' action (or lack thereof) on carbon and energy policy.  Sleeping in the bed one made...  And the problem with that is taxpayers are there too.

But AGL's CEO grandstanding may come back to bite if it goes too far - with Bill Shorten calling into question privatisation of the energy sector in the 1990's.  Electricity generators and many others (shopping centre REITs for instance) are calling for energy and carbon policy, not undoing privatisation.

Staying on the energy theme, gas producer and LNG exporter Santos announced it will take 30PJ (a fairly meaningful amount, but not game changing) out of its 2018 and 2019 export volumes, to instead feed the domestic market.  This comes as the government report into effectively quarantining gas for domestic use (instead of LNG export) is due shortly - with Santos widely considered as the main culprit in relation to taking gas out of the domestic market to meet shortages on its LNG export commitments.

It was also a big week of economic news in Australia.  GDP data improved (+0.8% for the Jun-17 quarter).  However, it is still weak (vs targets and long term trends), and supported by retail and government spending (not healthy). The AUD reached a 2 year high (>80 US cents), and trade data was weaker than expected (July surplus $460m vs ~$1billion expected).