Shrinking estimates for Pohokura send Contact Energy shares up

11.30am

Contact Energy shares soared 10 cents to a new record of $4.22 today on news that estimates of the size of the undeveloped Taranaki gas field Pohokura have been downgraded.

Pohokura, the main hope to replace the rapidly depleting Maui field which supplies 80 per cent of New Zealand's gas needs, might be 45 per cent less than first estimated, the owners Shell and Todd Energy said yesterday.

The rejection by institutions of Edison Mission's $4.14/share bid for a full takeover a year ago seems to have been vindicated

Even before yesterday's announcement about Pohokura, Macquarie Equities had a $4.45/share valuation on Contact and investment director Arthur Lim said his analyst was tweaking the price higher.

"If we were to tweak the long-run price of electricity slightly higher than where we are at the moment, it's not very hard to get a valuation in excess of $5 fairly quickly," he said.

Mr Lim said Contact has had several factors running in its favour lately. With hydro storage levels already below average, coupled with low inflows and strong demand, there is concern there will be a re-run of the winter of 2001 when wholesale prices shot up ten-fold.

Contact Energy, as a balanced generator with hydro, geothermal and predominantly thermal stations, is seen as a beneficiary of higher power prices.

Strong demand and cooler than normal weather have been pushing prices above average for this time of year.

Mr Lim said that Energy Ministry projections of growth in electricity demand of 2 per cent per annum is lower than the recent economic growth rate that has exceeded 3 per cent for the last three years.

Historically, demand for power runs stronger than the economic growth rate, so a growth of 5 per cent per annum in electricity would not be out of line.

"The value of Contact Energy as a net generator of power, especially with a good hydro as well as thermal base, is one company that will benefit enormously from the kind of scenario we are looking at.

"The spur on this morning is definitely on the news on Pohokura," he said.

Less gas available means the price of gas will go up and the marginal cost of generating electricity would rise.

Generators such as Mighty River Power, Meridian and Contact Energy would all reap gains as their marginal costs of generating hydro or geothermal power would not rise.

- NZPA