Oil prices may have fallen -28% since the beginning of October but Macquarie's analysts expect a relief rally, which should have positive implications for stocks under coverage. Support for oil prices is expected in the near term because of cold weather in the northern hemisphere at an end to the refinery turnaround period.
On the supply side, OPEC is expected to bow to the inevitable and cut production at either the G20 meeting on November 30 or at its meeting with Russia in Vienna on December 7.
Oil Search ((OSH)) remains Macquarie's preferred large cap oil stock. The broker believes it has the greatest leverage to near-term oil upside. Santos ((STO)), also rated Outperform, has reduced its leverage and exposure to oil prices following the recent acquisition of Quadrant Energy. Woodside Petroleum ((WPL)) is the least preferred, as it is trading at a premium to both Oil Search and Santos but without the growth potential.
Beach Energy ((BPT)), rated Neutral, offers near-term exposure to an oil rally but the risk to growth targets tempers the broker's enthusiasm. Macquarie prefers Cooper Energy ((COE)) and Senex Energy ((SXY)) among mid-cap oil stocks as both offer exposure to east coast gas prices.
Ord Minnett agrees the Australian energy sector looks more attractive after the drop in benchmark oil prices. The broker was concerned about full valuations but now find share prices in four out of the six energy stocks under coverage are below valuation. Hence, the broker upgrades Santos and Origin Energy ((ORG)) to Buy and Woodside and Senex to Accumulate.
Ord Minnett believes Santos offers growth, with production expected to increase more than 75% over the next six years. Origin Energy is also attractive, as wholesale prices could have a positive impact on the company's retail electricity business. Ord Minnett reiterates a Buy rating for Beach Energy as, while it is most exposed to domestic markets, it has a strong balance sheet.
SXY Price at posting:
38.0¢ Sentiment: Buy Disclosure: Held
