Aussies cop slow-burn

IF YOU believe the consensus views of investment banks Australia’s big three oil and gas companies are over-valued and due for fall, a view which Slugcatcher believes sits oddly with the price of oil as it marches higher toward US$60 a barrel in both Europe and the US.

    • Slugcatcher
    • 27 November 2017
    • 07:10
    • News
Aussies cop slow-burn

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The European, or Brent-quality crude price, passed $60/bbl a month ago. The US, or West Texas Intermediate price, was nudging $59/bbl on Friday, aided by a leak in the Keystone pipeline.
 
The upward trend over the past three months has produced the best conditions for oil and gas since mid-2014 when the price crashed under the weight of the global oil glut.
 
But, if the price is looking good why isn't there greater investor interest in Australia's top oil and gas stocks, Woodside, Oil Search and Santos?
 
One part of the answer to that question is that all three are dominated by gas, specifically liquefied natural gas which is priced according to oil, but with a time delay that is compounded by a surplus of LNG in the Pacific Basin and the entry of the U.S. into the European market.
 
Another part of the answer is that all three have significant management challenges that range from a lack of clear new-project developments option (Woodside), a complex ownership structure (Santos), and a bold expansion plan to transplant a tropical island specialist into the frozen Wasteland of northern Alaska (Oil Search).
 
While it might be somewhat misleading a few percentages highlight the point about Australia's big three of oil and gas being undervalued rather than overvalued as many bank analysts seem to believe.
 
Oil, the asset which underpins everything, has now risen by a healthy 18% over the past three months with Brent up to $63.86/bbl and WTI up to $58.95/bbl, a two-year high.
 
Contrast that 18% rise with an anemic 4.8% increase in the share price of Oil Search over the same time, a 7.5% rise by Woodside, and a much more interesting 46% rise by Santos.
 
Two inconsistencies are apparent in those numbers. The first is that Oil Search and Woodside are not keeping pace with the oil price (because they're gas stocks). The second is that Santos, also a gas stock, has dramatically outperformed oil.
 
So, what's going on in the Australian oil patch? Why are the share prices of Woodside and Oil Search struggling and why has Santos soared?
 
The answer is that investors have been lured to Santos by the promise of a bidding war which might be ignited as a private-equity group called Harbour Energy considers its options.
 
Having initiated deal talk a few months ago Harbour is now in a put-up or shut-up position.
 
Oil Search, on the other hand, also has a spot of corporate activity on its plate, but it's obviously not the sort that investors like with the primary worry being that they prefer their company as a specialist PNG gas producer, and worry about the risks associated with an adventure in Alaska.
 
Woodside should be doing better than its 7.5% rise because it also has been part of a corporate event that should have made it more appealing to investors and that's the final sell-down by Shell of its once dominant stake in the stock.
 
Credit Suisse and Citi have been the harshest critics of Woodside in its post-Shell phase, noting that while Shell's exit might not affect plans to develop the dormant Browse gasfield a major shareholder exiting a company's share register is not an encouraging sign.
 
According to Credit Suisse, Woodside is heading for a share price of $26.20, down the best part of 17% on Friday's ASX close. Citi is tipping a future price for Woodside of $27.25.
 
Oil Search is in a similar boat as Woodside, seemingly unable to impress investment bank analysts, especially those at Citi who see Oil Search on track for a price of $5.79, down 19.5% on Friday's close.
 
Santos has a few more friends among the investment banks, but that seems to be a view directly connected to the corporate activity, though the hard heads at Citi have been only able to manage a neutral view of Santos and a price target of $5.16, up just 16c on Friday's close.
 
While every investor has a different view of the big three in Australian oil and gas there is an event occurring in conjunction with the share-price moves, and that's a possible change in the pecking order.
 
Until a few weeks ago the rankings were quite clear with Woodside on top with the biggest stock-market value, followed by Oil Search as it enjoyed the benefits of low-cost LNG, and Santos a distant third as yet another management team tried to revive the company.
 
Today, the pecking order is close to an interesting change with Santos on the cusp of reclaiming second spot thanks to a market value of $10.6 billion, a shade under the $10.9 billion of Oil Search - with Woodside untroubled at $26.6 billion.
 
A few cents up by Santos, or a few cents down by Oil Search and Australia could have a largely irrelevant, but nevertheless interesting, change in its oil and gas rankings.
 
 

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