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2 under-valued Aussie oil majors

Glenn Freeman  |  23 Oct 2018Text size  Decrease  Increase  |  
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Morningstar has reaffirmed its outlook for Australia's top two oil and gas companies after they released third-quarter production figures.

Woodside Petroleum (ASX: WPL) reported revenues that were lower than expected for the quarter ended September 2018. This prompted Morningstar's senior equity analyst Mark Taylor to reduce his 2018 earnings per share estimate by 4 per cent, to $2.12 from $2.20.

"This was in part due to volumes being tempered by the timing of Woodside’s equity sales, and they will be made up for," he says.

By contrast, his 2019 EPS forecast for Woodside is up 24 per cent, and his $46.50 fair value estimate is unchanged.

oil gas Santos LNG

Ongoing oil and gas price strength continue to support Woodside and Santos performance

"We now assume a 2019 Brent crude price of US$82 per barrel and an Australian / US dollar exchange rate of 0.71.

"Longer-term assumptions, including a US$60 per barrel mid-cycle Brent crude price, substantially remain," Taylor says.

Woodside's disappointing price achievement from its Pluto LNG project – almost $2 below Morningstar's target price per million British thermal units – was among the negatives.
"We hope this is just an anomaly," says Taylor.

On the upside, he points to its selection of the contractor for its second Pluto LNG train, and further progress on the Browse Basin project.

"These elements overall constitute about $6.50 or 14 per cent of our Woodside fair value estimate, so there is considerable comfort in their continuing progress," Taylor says.

Slashed among Santos' positives

Australia's second-largest oil and gas player, Santos (ASX: STO), has also retained its fair value estimate. Morningstar increased this by 12 per cent last month after management "laid out the path by which it intends to grow group production to 40 million barrels of oil equivalent", says Taylor.

Santos increased its third-quarter production by 6 per cent to 15 million boe, in line with Morningstar's expectations.

In addition to his broader sector assumptions on oil price, Taylor points to the company's ongoing debt reduction – which is more than 12 months' ahead of schedule.

The proposed Quadrant acquisition also factors into Morningstar's fair value estimate, which will add 19 million boe per annum if approved – an outcome Taylor believes is more likely than not.

While he notes this additional production is already factored into his modelling, other proposed deals, including the Doradoand Barossa LNG projects, are not.

"We think waiting for greater clarity on these projects prudent before crediting full value. But the market’s even more dovish position overly discounts CEO Kevin Gallagher’s growing record for delivery, in our opinion," Taylor says.

Santos was trading at $6.89 at 3pm Tuesday, slightly below Morningstar's $7.85 fair value estimate.

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Glenn Freeman is senior editor at Morningstar Australia.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

 

is senior editor for Morningstar Australia

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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