The Australian energy sector has been sold off – down some 15% over the past year – and some major Aussie oil and gas stocks are looking cheap.
The International Energy Agency’s 2012 World Energy Outlook (WEO) projects that by 2030 global oil demand will hit 116 million barrels per day (mb/d) compared to 32 mb/d in 2006. The big driver is an expected spike in the number of vehicles on the road globally – anticipated to jump from today’s 900 million to 2.16 billion by 2030. Roughly 42% of that increase in demand will come from China and India.
What about gas? Interestingly, the WEO report forecasts that the shale oil and gas revolution in the United States will change the supply flow globally. The IEA states that by 2020 the US will be a net exporter of natural gas and will reach energy self-sufficiency in 2035, in net terms. But the big shocker from the report was the prediction from IEA Chief Economist Fatih Birol that the US is destined to become the world’s largest oil producer, supplanting Saudi Arabia in less than a decade.
The report forecasts strong demand continuing for natural gas, up 50% by 2035. The IEA reckons half of this increased production of natural gas will come from unconventional sources (shale gas and coal seam gas) in the United States, Australia, and China.
Assuming this demand forecast is reasonably accurate, Australia’s top oil and gas producers are in the hot seat, particularly over the longer term.
Short term events, however, could send oil prices lower and key stocks along with it. The candlestick chart (below) shows the sudden drop in price of West Texas Intermediate (WTI) crude oil over the past few months:
Recently, both IEA and OPEC cut price forecasts for 2012 and early 2013 citing slowing global growth.
There is no question that investing in the energy sector right now is fraught with risk. For this reason, it’s important to do your homework.
To that end we culled the ASX XEJ looking for companies with forward P/E’s under the value investing benchmark of 15, with a minimum market cap of $100 million.
Here are five energy sector companies worth researching further:
2 Yr Earnings Forecast
Y over Y Share Price Change
Miclyn Express Offshore
Of the six in the table, Woodside, Beach and Roc Oil could be considered oil and gas pure plays. Caltex is Australia’s only locally-owned petroleum refiner with a retail operation as well – and Miclyn Express is a service provider to the sector. Finally, there’s BHP, the world’s largest diversified mining operation with substantial oil and gas interests. Note that only Woodside and BHP have seen share price declines year over year.
Woodside Petroleum (WPL) is Australia’s top oil and gas pure play. The company produces 800,000 barrels of oil a day from facilities around the world including the Gulf of Mexico off the United States. Woodside has exploration interests in the Republic of Korea, Brazil, Peru, and the United States.
Despite solid performance in oil production, most investors connect Woodside to its LNG (Liquefied Natural Gas) interests. Woodside’s Pluto LNG facility is hitting record production levels, yet its share price has suffered due to cost overruns.
Here is Woodside’s one year chart compared to the ASX 200 XJO:
WPL has gearing at 38.1% with total long-term debt of $4.2 billion. Recent half-year results showed a 6.6% increase in net operating cash flows to $2.3 billion.
Woodside sold a stake in its next LNG project, Browse, to improve its balance sheet and is looking to expand operations into the Mediterranean – off the coast of Israel in the newly discovered Leviathan gas find – as well as into Myanmar (Burma). While much of the investing community is critical of the cost overruns at other Australian LNG projects, Woodside is ramping up production at the already successful Pluto. Four of Australia’s major analyst firms have BUY recommendations on WPL with only BA-Merrill Lynch at UNDEPERFORM.
Caltex (CTX) operates exclusively in Australia and is the only integrated oil refining and distribution listed on the ASX. The company buys crude oil on international markets, which may explain the 35% share price increase year over year. Here is the company’s chart:
Caltex has dominant market share, brand strength and an impressive distribution chain. However, it is heavily dependent on the price of crude, which increases its risk enormously. In August 2012 Credit Suisse downgraded the stock to UNDEPERFORM citing valuation concerns.
Beach Energy (BPT) is Australia’s first entrant into the shale gas revolution. Here is its one year price chart:
Although Beach produced 7.5 million barrels of oil in Fiscal Year 2012, the company’s potential is in shale gas. Beach was the first with an exploratory well and is a 20% partner with majority owner Santos (STO) in a joint venture project in the South Australian Cooper Basin. The project began selling shale gas on 19 October 2012. Beach holds 100% ownership in a development project in the basin at Moonta as well as a 50% ownership in another shale gas joint venture.
Singapore based Miclyn Express Offshore (MIO) provides service vessels to the offshore oil and gas industry operating in Australia, South-East Asia and the Middle East. The company is relatively new to the ASX, with trading commencing in March 2010. Miclyn also works with offshore infrastructure developers and goes beyond simply providing ships. Management support to tailor shipping to unique customer requirements is a major part of what they do. The share price is up about 20% this year. Here is the chart:
The company’s Full Year earnings report showed some impressive results, including a 61% increase in revenue; a 20% increase in Net Profit after Tax; and a 19% increase in Earnings per Share. With a forward P/E of 7.52 and a dividend yield of 2.8%, this stock deserves some consideration.
Roc Oil (ROC) is up 65% year over year. The company operates oil and gas exploration and production assets in Australia, Africa, the United Kingdom, Malaysia and China. The company has managed to develop working relationships with some very big partners, including national oil companies like PetroChina and Sinochem in China and Petronas in Malaysia.
Here is the one year price chart:
While ROC has solid prospects in multiple areas, it is the expected success of the Beibu Gulf project that investors are watching closely. The Beibu/Tonkin Gulf sits between Vietnam and Hainan in the South China Sea, and sovereign risk is an issue. However, on 15 November China’s National Development and Reform Commission (NDRC) approved commercial production in two offshore oil fields in the Beibu Gulf to Cnooc, ROC’s partner in the project. Cnooc has a 51% controlling interest, while ROC holds 19.6%.
With a forward P/E of 8.0 and a 27.1% 2 year earnings growth forecast, ROC is certainly a stock for your watchlist.
BHP Billiton (BHP) is the most diversified resource company in the world. The company prefers to explore in proven areas in the U.S. Gulf of Mexico, Australia and the South China Sea. BHP also has oil exploration assets in the Philippines, India, Trinidad and Tobago, Algeria, Pakistan and Malaysia.
The company took a hit from write downs on its US shale gas acquisitions in the US due to the dramatic drop in natural gas prices; the shale gas revolution became too much of a good thing. However, BHP still believes in the future of shale gas and are buying more US shale assets.
It would be hard to find another blue chip stock with BHP’s scope – with a forward P/E of just 10.42 and a respectable dividend yield of 3.4%. Here is the company’s one year price chart:
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