Spot of Caution

Since the announcement by OPEC to extend production cuts into CY18, the Brent spot price has rallied strongly. The Australian energy-exposed equities have (not surprisingly) followed suit, with the average of Ord Minnett’s coverage universe up 55% since mid-CY17 versus the 7% increase in the S&P/ASX 200.

 

We have upgraded our Brent price forecasts – using our typical method of the forward curve to the closest US$5/barrel (bbl) – to US$65/bbl in CY18 and US$60/bbl in CY19. However, we have retained our US$55/bbl long-term price forecast. We remain cautious on the commodity for the medium term pending a response from US shale producers to higher prices. With little apparent value in the sector and the potential headwind of lower oil prices, we are now turning more negative on the sector.

 

We have downgraded our recommendation on Woodside Petroleum (WPL) to Lighten from Hold, Origin Energy (ORG) to Hold from Accumulate, and Senex Energy (SXY) to Hold from Buy, while we maintain our Accumulate rating on Oil Search (OSH).

 

  • Woodside Petroleum – The revised oil price estimates have led us to raise our near-term earnings forecasts for Woodside. We are now at the top end of the consensus range and we expect the market to upgrade as higher spot oil is incorporated into forecasts. However, given the long-dated nature of Woodside’s projects, there is little change to our NPV. The stock’s recent strong performance has seen the share price exceed both our base-case and spot NPVs. We have downgraded our recommendation on Woodside to Lighten from Hold based on valuation, with a normalisation of oil prices the likely catalyst for the stock.
  • Origin Energy and Senex Energy – We have raised our earnings estimates for both Origin and Senex, but our valuations have not changed significantly. With both stocks now trading close to our NPVs, we have downgraded Origin to Hold from Accumulate and Senex to Hold from Buy.
  • Oil Search – We reiterate our Accumulate recommendation on Oil Search as our preferred stock in the sector. We still see value in the company at a base-case price/NPV of 0.95x and a spot price/NPV of 0.79x. Over the longer term, we believe Oil Search offers fully funded production growth through the PNG LNG expansion project and the recent Nanushuk acquisition, along with potential corporate appeal.

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