No end in sight for oil price collapse

Angela Macdonald-SmithSenior Resources Writer

UpdatedMar 19, 2020 – 4.53pm,first published at1.13pm

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Oil and gas producers suffered another heavy pounding on the sharemarket on Thursday after Brent crude oil saw a further sell-off to lows not seen since 2003, sending prices below cashflow breakeven rates.

The collapse in prices into the low $US20s a barrel range has further stoked worries about the ability of Australian players to withstand the impact ofthe brutal price war between Saudi Arabia and Russiathat has been worsened by soft demand due to the COVID-19 pandemic.

and there is potentially further to go, with Credit Suisse becoming the latest to suggest – citing Rystad Energy – thatsingle-digit oil prices can't be ruled outfor a period if the key players in the former OPEC-plus alliance don't change course.

Even players with some of the strongest balance sheets or less exposure to oil prices took a hammering, with Beach Energy shedding 12.2 per cent and Cooper Energy losing 3.8 per cent.

Woodside's proposed Pluto LNG expansion using gas from the Scarborough field is widely expected to be deferred. Woodside Petroleum

Oil Search was again the worst hit, dropping 16.8 per cent to $2.03 amidmarket worries that it will breach covenants on its debt. The company advised on Wednesday that its cashflow breakeven price, excluding spending on growth projects but including debt repayments, is $US32-$US33 a barrel this year.

But it downgraded its call on the stock to "underperform" from "neutral", noting that "should low oil prices persist the market may nevertheless shift out of OSH into names where ‘debt covenants’ and ‘bank relationships’ aren’t part of the conversation".

"And we can’t rule out pressure towards equity raise territory," Credit Suisse said.

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Meanwhile, Morgan Stanley analyst Adam Martin added to the growing consensus that growth projects by Woodside Petroleum and Santos will be shelved,

Mr Martin expects Woodside to cut its capex forecast by nearly 50 per cent for 2020 and is assuming a one-year delay to the $16 billion Scarborough LNG project in Western Australia.

Santos might cut capex guidance by $US400 million, he said, adding the final go-ahead on the $7 billion Barossa gas project – which is due in the June quarter – is likely to slip into 2021.

Mr Martin is expecting heavy asset write-downs given the oil price assumptions of $US65 a barrel or more that are underpinning book valuations and said mergers and acquisitions across the sector "could see a serious pick-up once prices settle".

"There will be a scramble for the lowest-cost assets and there are balance sheets out there that are not strong enough to develop their assets once prices stabilise," he said.

Woodside shares dropped another 7.7 per cent to $15.91, down from over $35 in January. Santos shed a further 12 per cent to $2.75, less than a third of its January levels.

Santos has a free cash flow breakeven of $US29 a barrel, but needs a price of $US60 a barrel to fund growth projects and maintain gearing in the absence of asset sales.

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