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Pockets of value in Aussie oil producers despite Saudi drone strike

Lex Hall  |  17 Sep 2019Text size  Decrease  Increase  |  
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Pockets of value remain among Australian oil exploration and production companies despite the spike in oil prices triggered by Saturday’s historic drone attack on two Saudi Arabian processing plants. 

Morningstar analyst Mark Taylor has increased his fair value estimates for several E&P companies by between 4 and 9 per cent, citing higher near-term crude price expectations and the time value of money (whereby money is worth more the sooner it is received). 

Taylor has made the following four upgrades to his fair value estimates - all four companies are no-moat rated.

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“At $32.70 Woodside remains the best value in our opinion, at a P/FV of 0.67 and a deep four-star rating. This is followed by Santos at $7.75, with a P/FV of 0.84, just within the three-star zone,” Taylor says. 

“At $7.75, Oil Search trades at a slight premium, with P/FV of 1.03 and a mid-three-star recommendation. While at $2.65 Beach Energy is on the highest P/FV of 1.08 and only just inside three-star territory.” 

Saturday’s attack on the Saudi Aramco oil processing facilities at Abqaiq and Khurais in eastern Saudi Arabia has knocked nearly 6 million barrels of oil a day from the country’s 9.6 million a day production – and is believed to be the biggest disruption to oil output in history.

The attack triggered a surge in oil prices and a slide in wider financial markets. While the Yemeni Houthi group claimed responsibility for the attack, a senior US official indicated Iran was behind it.

Brent crude futures settled at US$69.02 a barrel overnight, rising US$8.80, or 14.6 per cent - its largest one-day percentage gain since at least 1988.

US West Texas Intermediate futures ended at US$62.90 a barrel, soaring US$8.05, or 14.7 per cent - the biggest one-day percentage gain since December 2008.

US President Donald Trump says the country is preparing to release reserve production and Trump gave an explicit warning the country is ready to take military action against the perpetrators.

Saudi Arabia, the world's biggest oil exporter, with its comparatively large spare capacity, has been the supplier of last resort of decades. 

A return to full production at Saudi Aramco "may take months", sources told Reuters.

This is not the first attack on oil production this year: oil tankers in the Strait of Hormuz were attacked in June this year. Military action in Libya and political chaos in Venezuela also helped support crude prices at the beginning of 2019.

Rising oil prices often have a conflicting effect on stock markets: oil-focused shares do well initially, and they make up a large part of market-cap weighted indices like the FTSE 100 and S&P 500. 

But surging oil prices are generally bad for economies as they stoke inflation. The prospect of a conflict in the Middle East also comes at a bad time for the global economy, with recession fears growing.

Taylor says that while the Saudis have been predictably optimistic about their ability to quickly get capacity back online, it is likely that latent capacity across the globe could be harnessed to make up for some of the lost output, though this could take some time to ramp up. 

Globally there are also strategic reserves estimated at 4.1 billion barrels, including 645 million barrels in the US, which can be partly drawn down to meet shortfalls for a considerable time, Taylor says. 

“So while we do see the potential for elevated Brent prices in the near-term, this reflects more the heightened geopolitical and infrastructure vulnerability concerns, rather than any genuine immediate and lasting supply tightness.

“A higher geopolitical risk premium in the crude price could boost the near-term earnings for oil and gas companies in our coverage in accordance with a stronger Brent futures curve, which we use for our near-term estimates. 

“But our mid-cycle $60 per barrel Brent crude price forecast (2022 dollars) for now stands, and changes to fair value estimates of the oil and gas stocks within our universe remain fairly minor. However, if the Abqaiq recovery is considerably more protracted than expected, or geopolitical tensions spill over into a greater supply disruption than currently, this situation could change.”

Gold gained 1 per cent overnight as investors pushed towards safe-haven assets.

is senior editor for Morningstar Australia

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