The standoff between OPEC and Russia has forced prices into a tailspin but fundamentals remain intact and Australian producers appeal, says Morningstar.

The four pure exploration and production companies that Morningstar covers – Woodside Petroleum (ASX: WPL), Santos (ASX: STO), Oil Search (ASX: OSH) and Beach Energy (ASX: BPT) – are trading at discounts of more than 50 per cent since the oil price war ignited earlier this week.

Morningstar analyst Mark Taylor says his fair value estimates for the four names have fallen by 6 to 16 per cent.

“At current share prices, appeal is broadly comparable with all names trading at roughly half fair value, and all in 5-star territory,” Taylor says.

“Stocks are certainly cheap at this price with discounts of 50 per cent or more; it's just a question of whether you want to wait one to two years.”

Fair value and rating

The coronavirus has curbed oil demand particularly in China. And the clash of oil titans Saudi Arabia and Russia sparked a 25 per cent slump in crude prices on Monday, triggering panic selling on Wall Street and other equity markets that have already been badly hit by the outbreak.

Oil prices recovered some ground on Tuesday but were still 40 per cent down on the start of the year.

The near-term outlook for energy companies is bleak, Taylor says, adding that he is not ruling out further weakening after the dust settles.

However, he anticipates these issues will only affect cash flows in the next one to two years.

“Russia and OPEC lack the capacity to displace US shale producers in the global supply stack, which means the marginal supply cost is still USD60/bbl Brent.

“We think vested interest should soon see order return to oil markets.”

Premium members can read Mark Taylor’s full report, including dividends forecasts for the companies mentioned

Taylor says Woodside and Beach appeal for the least near-term balance sheet risk, while Woodside, Santos and Oil Search offer low-cost operations.

“On balance, we think Woodside and Santos are the best overall packages because of a combination of low operating costs and strong balance sheet,” Taylor says.

“Santos are also less reliant on growth projects and more insulated from price volatility because of their LNG contracts. But their balance sheet isn’t as good as Woodside’s.”

“Beach may have the highest free cash flow breakeven, but this is countered by its net cash position. When prices fall, market attention rightly turns to balance sheets, and Beach has a pristine one.

“Oil Search, on the other hand, is carrying $3.4 billion of debt. It’s net debt to equity is 65 per cent, which is quite high. However, they’re a low-cost operator, which is good for them."

Net debt analysis