There’s talk that oil and gas stocks, and telcos, could be the ones to back in the coming years as the global economy gathers steam. Patersons Securities is forecasting oil & gas to deliver 12-month total returns of up to 20 percent, and telcos (ex Telstra) around 30 percent-plus. Total return includes capital gains and dividends. This compares to a forecasted return of 13.4 per cent for the wider market measured by the S&P/ASX 200.

Scott Simpson analyst with Patersons Securities is keen on energy stocks courtesy of global growth and higher oil prices by 2012. Plus, there are company-specific events for majors like Woodside (WPL) and Santos (STO), which between them comprise 44 percent of the Energy Index – plus pending drilling campaigns that could potentially re-rate some promising mid-caps.

And as for the telecommunications sector, Ian Martin of RBS Securities has a bullish outlook for a handful of small-cap telcos wired to growth in mobile and broadband technologies. Telstra, which represents 90 percent of telcos by market cap, will be the biggest drag on the sector, notes Martin. Despite offering a 10 percent fully franked yield, Martin argues that there’s still excessive regulatory uncertainty – especially around broadband – to warrant being upbeat on Telstra (TSL) – even though the downside at current levels looks minimal.

Yet even when adjusted to include Telstra, Patersons still expects the telco sector to deliver a ‘none-too-shabby’ total return of 12.6 percent.

When we asked three brokers to identify stocks within the oil and gas and telecommunications sectors most likely to deliver exceptional share price performance, here’s what they said.

Scott Simpson, Analyst, Patersons Securities

Top picks – Oil & Gas

Woodside Petroleum (WPL): As Australia’s premier oil and gas play, Woodside’s production is forecast to grow strongly on the back of higher gas pricing and a stable mid-term outlook for oil, north of US$83/84 a barrel. LNG interests in the North West Shelf off the WA coast are a core driver, with Woodside now looking to secure more gas volumes to support potential expansion. The Pluto LNG project is all but finished and final investment decisions are on track for some time in 2011. The company posted a 40 percent rise in first half profit, and expects natural declines across its portfolio of producing fields to be offset by stronger production from the North West Shelf. Brokers are forecasting EPS growth of 48 percent in 2011 with yield jumping from 2.7 percent to 3.6 percent a year later.

Santos (STO): Strong energy prices are underpinning assets, with replenishment of its declining cornerstone Cooper Basin assets coming from its coal seam gas (CSG) and proposed LNG gas stgelopments. Santos recently signed an agreement to supply 750 petajoules of gas from its uncontracted Cooper Basin P2 reserves to the newly-approved Gladstone Liquefied Natural Gas plant in Queensland over 15 years. Brokers expect EPS growth of 26 percent in 2011 and a yield of 3.0 percent.

Cooper Energy (COE): With $0.32/share in cash and the cornerstone producing Cooper Basin valued at $0.20/share, the conventional upstream oil and gas producer trades at a 55 per cent discount to Simpson’s $0.67 target price. Included within Cooper’s busy 2010/2011 drilling program are wells in Tunisia, the Cooper Basin – plus new ventures in Romania and Poland. If successful, Simpson says the onshore Menzel Horr wells in Tunisia Rig, due for drilling in November, could add a 70 cents upside to the current price.

CUE Energy Resources (CUE): The oil and gas explorer/producer’s three producing assets, Maari (NZ), Sampang PSC (Indonesia) and SE Gobe (PNG) provided solid cash flow of $54.7 million production income in full year 2010. A final investment decision is expected at its Wortel gas field (105bcf) late in 2010 (15 percent interest), with the first gas planned late 2011. Simpson expects drilling success at its Carnarvon Basin Prospects, Artemis and Caterina – in which it has 15 per cent and 35 per cent interests respectively – to potentially add around $1.00 a share each unrisked. The stock currently trades on a 30 per cent discount to Simpson’s $.052 target price.

John Young, Senior Resources Analyst, Wilson HTM

Top picks – Oil & Gas

Horizon (HNZ): One of Australia’s leading junior oil and gas companies, Horizon has a 10 per cent interest in the Taranaki Maari oil field production providing solid cash flow that’s expected to ramp up to peak rate by year’s end. Drilling of Horizon’s PNG assets is expected to commence this month to appraise the large, liquids-rich Stanley and Elevala/Ketu gas resources. Young expects further upside from oil stgelopments in China and gas/condensate commercialisation in PNG. The stock current trades at a 15 per cent discount to Young’s $.043 target price.

Molopo Energy Ltd (MPO): While Young believes the junior oil and gas explorer is around 15 per cent undervalued at current levels ($1.75), he expects a share price re-rating to follow greater market confidence that the production trajectory can be sustained. He expects delivery of short to medium-term production to carry more weight than further project additions. Development activities at the Spearfish tight oil project in Canada are progressing well and Young says Molopo’s coal seam gas (CSG) reserves in Queensland are well positioned to capitalise on expanding domestic and export LNG markets.  “We expect Molopo’s CSG to be aided by the proximity of the reserves to Gladstone and the expected involvement of its JV partner Mitsui in future LNG offtake.”

AWE (AWE): Strong cash flow from diversified production, zero debt and a stable production outlook provides a solid investment basis for this petroleum explorer/producer. Young says AWE’s exposure to unconventional resources – shale gas in the onshore Perth Basin and gas/condensate from the Eagle Ford shale in Texas – offers potential for staged appraisal and stgelopment and significant reserve upside, should evaluation prove successful. The stock currently trades at a 48 per cent discount to Young’s $2.30 target price, recently upgraded due to BassGas project revisions.

Beach Energy (BPT): Last September’s announcements around the potential supply of Cooper Basin gas to the Gladstone LNG (GLNG) project is a major step towards commercializing the large contingent resources owned by Beach, and others. Young expects the proposed oil-indexed formula to lead to higher gas prices to support the stgelopment of unconventional resources – including tight gas and shale gas – with the GLNG project providing a large and expandable outlet within a relatively short time frame, with first sales from around 2015. He’s also encouraged by September quarter results which demonstrate that Beach’s existing production base provides the necessary cash flow to support the required resource stgelopment program – plus funding a strong exploration program both in Australia and overseas. The stock currently trades at a 29 per cent discount to Young’s $0.90 price target.

Ian Martin, Telco analyst, RBS Securities

Top picks – Telcos

SingTel Telecommunications (SGT): A lazy balance sheet – net debt-to-equity of 20 percent – the strong A$, plus solid growth from its Australian subsidiary, Optus have ideally positioned SingTel to capitalise on future market opportunities. It’s understood the telco is in advanced negotiations to transfer its cable broadband customers to the national broadband network (NBN) being championed by the Labor government. Optus recently delivered its seven consecutive quarters of double-digit mobile service revenue growth. Trading at around a 40 per cent discount to Martin’s $3.44 price target, SingTel is forecasting operating revenue and EBITDA at its Australian arm to grow at mid single-digit levels for the year ending March 31, 2011, and for capital expenditure to be around $1.2 billion.

Amcom Telecommunications (AMM): Strong demand for its data services from corporate, government and wholesale sectors saw the Perth-based fibre optic network operator, post a net profit for the 12 months to June 30 of $17.25 million, up 43 per cent from a year earlier. As well as experiencing high growth in its data services business, Amcom also has exposure to the consumer broadband market through a 22.4 per cent stake in internet service provider, iiNet Ltd. Net profit for the current financial year is expected to be at least 20 per cent up on last year, and Martin has $0.38 target price on the stock.

iiNet Ltd (IIN): The Perth-based Telecommunications provider increased full year net profit by 35 per cent and is looking to consolidate growth through further integration of recent acquisitions, including Netspace, and the $60 million acquisition of the consumer division of AAPT. Martin likes the stock’s huge exposure to the growing consumer broadband market and expects it to play a significant role in the National Broadband Network (NBN) rollout. Currently trading on a 14 per cent discount to Martin’s target price of $3.28, iiNet is close to achieving 15 per cent market share in the DSL Internet market.

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