The war in the Middle East, which started on Feb. 28, 2026, is a highly dynamic situation. While the US and Israel have achieved clear air superiority, Iran has effectively choked the Strait of Hormuz, threatening shipping deemed allied to the coalition forces.

Why it matters: The strait is one of the world’s most important maritime routes, with about 20% of global crude volumes passing through. For now, transit is halted with about 15 million bbl/d stranded.

  • US President Donald Trump has threatened to destroy this infrastructure if Iran continues to restrict shipping. This would be a meaningful restriction on the world’s 104 million bbl/d demand. Kharg Island is responsible for 90% of Iran’s exports, or 4.6 million bbl/d of liquids.
  • But even in such a scenario, longer-term, we still think Saudi Arabia and the United Arab Emirates have enough spare capacity to drive prices back down to midcycle. A prolonged conflict would likely only delay but not impair this outcome.

The bottom line: We maintain our USD 65 per-barrel midcycle Brent crude price. Only in a remote probability/high-severity scenario where an attack on Kharg Island knocks Iran’s exports offline, or where Iran carries out an impassible structural block, might we change our view.

  • We continue to use futures prices in our models’ next two-year outlook. These have strengthened markedly, including by about 40% on average for Brent crude, and 75% for Asia spot liquid natural gas. Upstream energy stocks have rallied sharply but remain undervalued.
  • Our fair value estimates for no-moat Woodside, Santos, Beach Energy, and Karoon Energy increase by 4% to $43.80, 6% to $11.10, 4% to $2.70, 14% to $2.85. Our fair value estimate for no-moat Strike Energy is unchanged.

Between the lines: Our year-one and year-two earnings forecasts for upstream oil and gas firms consequently increase on average by 68% and 47%, respectively. However, futures curves decline steeply further out.

Woodside (ASX: WDS)

As Australia’s premier oil player, Woodside Petroleum’s operations encompass liquid natural gas, natural gas, condensate and crude oil. However, LNG interests in the North West Shelf Joint Venture, or NWS/JV, and Pluto offshore Western Australia are the mainstay, and the low-cost advantage of these assets form the foundation for Woodside. Future LNG development, particularly relating to the Pluto project, encompasses a material percentage of this company’s hydrocarbon production volumes.

Woodside is unique among Australian energy companies in that it has successfully managed the development of LNG projects for more than 40 years—unparalleled domestic experience at a complicated and expensive task. Adding to Woodside’s competitive advantages are the long-term 20-year off-take agreements with the who’s who of Asia’s blue chip energy utilities, such as Tokyo Electric, Kansai Electric, Chubu Electric, and Osaka Gas. These help ensure sufficient project financing during development and bring stability to Woodside’s cash flows once projects are complete. Woodside also enjoys first-mover advantages. The NWS/JV has invested more than AUD 27 billion since the 1980s, building infrastructure at a fraction of the cost of today’s developments. With substantial growth aspirations, Woodside still has considerable expenditure ahead of it, but the existing infrastructure footprint is regardless a huge head start, from both an expenditure and a regulatory-approval perspective.

Woodside’s development pipeline is deep, enabling it to leverage the tried and trusted project-delivery platform as a template for other world-class gas accumulations off the north-west coast of Australia. Woodside is well suited to the development challenge. With extensive experience, it remains a stand-out energy investment at the right price. Gas is the fastest growing primary energy market behind coal, and the seaborne-traded LNG portion of that gas market grows faster still. China is building import terminals, and demand is picking up, helping to keep LNG pricing toward oil parity on an energy-equivalent basis.

Santos (ASX: STO)

Santos is the second-largest Australian pure oil and gas exploration and production company (behind Woodside Petroleum, ASX:WPL), with interests in all Australian hydrocarbon provinces, and Papua New Guinea. Santos is now one of Australia’s largest coal seam gas producers with substantial reserves. It is the country’s largest domestic gas supplier.

Coal seam gas purchases in the mid-2000s increased reserves, and partial sell-downs generated cash profits, putting Santos on solid ground to improve performance. Group proven and probable, or 2P, reserves doubled to 1.4 billion barrels of oil equivalent, primarily East Australian coal seam gas. Coal seam gas now represents around 20% of 1.6 billion barrels group 2P reserves.

A degree of confidence can be drawn from project partners. US energy supermajor ExxonMobil, the world’s largest publicly traded oil and gas company, is 33% owner and the operator of the PNG LNG project. The Gladstone LNG project was built and is operated by GLNG Operations, a joint venture of owners Santos (30%), Petronas (27.5%), Total (27.5%), and Kogas (15%). Petronas is Malaysia’s national oil and gas company and the world’s second-largest LNG exporter. French energy major Total is the world’s fifth-largest publicly traded oil and gas company, and Korea’s Kogas is the world’s largest buyer of LNG. Santos is in good company.

Overall, we see a solid future for Santos, aided via improved margins and earnings driven by Gladstone and PNG LNG. The company enjoys export pricing on its gas. In addition to Santos’ Gladstone LNG, several other third-party east-coast LNG projects conspired to drive domestic gas prices higher. As the largest domestic gas supplier, Santos gets significant bang for its buck, with limited additional capital or operating cost required to capture enhanced prices.

Beach energy (ASX: BPT)

Beach Energy produces oil, gas, and gas liquids from multiple wholly owned projects and joint ventures in the onshore Cooper, Perth, and Eromanga basins, and offshore in the Otway, Bass, and Taranaki basins. Beach merged with Cooper Basin joint-venture partner Drillsearch Energy in March 2016, which increased equity production to about 10 million barrels of oil equivalent. This more than doubled to over 20 million boe following the purchase of Lattice from Origin Energy in 2018. Lattice’s scale enhancing incorporation, expanding Beach’s footprint across multiple basins and production hubs, resulted in an increase in EBITDA margins. But even with Lattice, our no-moat rating stands. Despite Lattice’s advantages, Beach does not have sufficient resource life beyond 15 years.

Beach’s goal to double production and reserves in five years was achieved via the AUD 1.6 billion acquisition of Lattice, rather than from organic growth. But the priority remains to expand output from existing reserves, mainly in the Perth and Cooper/Eromanga basins. Beach has in the past also pointed to huge potential for unconventional shale gas in the Cooper and elsewhere.

The Waitsia project has become an inaugural accessor of North West Shelf Project liquefaction capacity of up to 1.5Mtpa to 2029. Beach’s 50% Waitsia Stage 2 gas expansion to 250 TJ per day (100% basis) is equivalent to around 1.6 Mtpa of LNG. Beach’s estimated share of the upfront development capital expenditure is AUD 600 million-AUD 650 million and Waitsia Stage 2 could increase Beach’s equity production by around 8.0 mmboe or a 40% increment current production levels.

Also implicit in Beach’s production growth is improvement in facility reliability, renewed Cooper Basin growth efforts and Otway gas plant production increase.

Karoon Energy Ltd (ASX: KAR)

Karoon Energy, formerly Karoon Gas Australia, was listed on the Australian Securities Exchange in June 2004 and spent its first 15 years or so raising equity to direct to petroleum exploration, including in the Browse Basin offshore Western Australia and in the Santos Basin offshore Brazil. The company raised over AUD 850 million in new equity between 2004 and 2019, but the approximate AUD 300 million market capitalization in 2019 basically reflected simply the remaining net cash on the balance sheet. No cash-generative assets had been delivered and no shareholder returns made.

Given the poor return on investment, the company ultimately decided to refocus efforts on more value-accretive production or development assets, while still leveraging existing in-house capabilities. To that end, Karoon bought a 100% interest in the Baúna oilfield from Brazil’s state-controlled Petrobras in November 2020 for USD 665 million. The deal included upfront payment of USD 380 million, to be followed by further payments of up to a combined USD 285 million between 2022 and 2026, subject to future oil price thresholds. Karoon raised an additional AUD 284 million in new equity to help fund Baúna.

Given the radically favorable turnaround in oil prices, the Baúna acquisition proved timely. Yes, Baúna is probably past its prime, with cumulative production of around 120 million barrels of oil before Karoon acquired it and 46 million proven and probable reserve barrels left. But the asset is well located, with excellent reservoir characteristics and simple and efficient infrastructure in the Santos Basin. Karoon doubled Baúna’s annual output to more than 8 million barrels via well interventions and new developments. This has reduced unit operating costs to around USD 15 per barrel from around USD 20 by better utilizing existing infrastructure.

Karoon also continues to actively screen additional potential acquisition opportunities with a focus on oil assets located in Brazil and the Americas. It bought its second asset, a 30% interest in Who Dat in the US Gulf in 2024, diversifying risk, amortizing corporate costs over more than one project, and expanding production opportunities.