Eureka Correspondence

Shale gas in Australia, giving a boost to investment, and retirees paying for parental leave.

Shale gas in Australia

Justin Braitling wrote an interesting article recently, Exploding shale. He made some generalisations, which while true in relation to some sources of shale gas in Australia are not true for all. For example, the Perth Basin is not remote and there are nearby gas pipelines that can be accessed. A number of companies are working in that region, including NWE and AWE. The former has had some good flow rates and an encouraging contingent resource estimates in relation to Arrowsmith 2. Certainly it has a way to go to establish commerciability.

Name withheld

Justin’s response: Thanks for your letter. The article articulated a number of common challenges faced by companies attempting to commercialise shale basins. The extent of these challenges will vary amongst basins across Australia. As you note, and as I highlighted in the article, all basins are some way off commercialisation. Investors should be careful not to pay too much too soon.

Giving a boost to investment property

I enjoyed Scott Francis’ recent article An after-tax bonus from shares, which compared returns from various asset classes. It indicated that shares provided the best return, with residential property not too far behind. I would welcome Scott’s observations on the “boost” to an investor’s bottom line that gearing of the investment portfolio could achieve. As an example, an investor may have $100,000 of funds available; if they were to buy shares with that and cautiously declined to gear the shares, then they would have a $100,000 share portfolio working for them. With those same funds, they could most likely acquire a $500,000 investment property. A slightly smaller return on a $500,000 asset would then be far superior in absolute terms to the higher return achieved on the $100,000 ungeared share portfolio.

Peter Hansen

Scott’s response: Thanks very much for the letter. The question of after tax returns is a very interesting one - and the ASX report (available on their website) does look at that question - although it looks at a common level of borrowing between the two asset classes. As you suggest, if you were more conservatively geared into shares and both shares and property provided similar returns, you would end up ahead with the more heavily geared property investment. Another thing to consider with this, if you were to borrow and invest in shares using a margin loan, might be the problems of a margin call and forced sale of shares during a market downturn, like the GFC.

Retirees paying for parental leave

I note that many business people are unhappy with the Coalition’s generous paid parental leave policy but I had not realised as a self-funded retiree I would have to help pay for it. Like most self-funded retirees, my investments are in dividend yielding stocks; the big banks, Telstra, Wesfarmers etc and the franking credits are gratefully received, but with Tony Abbott planning on reducing the business tax from 30% to 28.5% it will mean that for every $3000 I receive in franking credits now I will received $2850 in the future. This means I will be about $500 a year worse off to help pay for this scheme. With the levy of 1.5% onto the said companies to pay for this scheme they will be no more profitable. With falling interest rates and now falling franking credits it will just means I will be falling onto a part-aged pension a bit sooner.

CW

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