Private Client Research 9 October 2020Energy SectorEarnings and...

Private Client Research 9 October 2020

Energy Sector

Earnings and valuation review

Ord Minnett has updated its oil price forecasts in line with the forward curve. Since July, near-term Brent prices have declined slightly, but the forward curve remains in contango*.

Overall, our earnings estimates and valuations have been affected primarily by the shifting of our US$60 per barrel (bbl) long-term oil price from CY23 to CY24. Extending the forward curve to CY23 has lowered our oil price in the period from US$60/bbl to US$45/bbl.

We continue to believe investors should seek a broad sector exposure driven by an expected recovery in benchmark oil prices.

With this note we upgrade Santos (STO), Beach Energy (BPT), Senex Energy (SXY), Cooper Energy (COE) and Origin Energy (ORG) to Buy from Accumulate based on valuation. Our key sector preferences are Santos and Beach Energy among the large caps under our coverage, and Senex Energy in the small caps.

Please see the table below for a full list of our energy sector ratings and target prices.

• Oil price – In line with our usual methodology of using the forward curve to the closest US$5/bbl, we have updated our oil price forecasts and the impact on stocks under our coverage. Our key changes are a shift in the start of our long-term US$60/bbl price from CY23 to CY24. We then use the forward curve over the next 13 quarters, which sees a lower CY23 oil price of US$45/bbl.

• Earnings and valuation – Overall, the key impact on our earnings estimates is modest, and our net present value (NPV) estimates have declined by an average of only 2%. We remain significantly below consensus for most of the stocks under coverage, potentially implying downside risk to market oil price forecasts.

• Santos – We continue to prefer Santos among large-cap stocks under our coverage. Our CY20 earnings forecast for Santos has increased 2% after incorporating actual September-quarter commodity prices. Relative to the forward curve three months ago, oil prices are higher but spot Australian gas prices are lower. The net increase in earnings somewhat demonstrates the quality of the company’s diversified asset base.

• Senex and Cooper – Within our small-cap coverage our preference remains Senex, followed by Cooper Energy. Both companies have fixed-price contracts and strong balance sheets. Carnarvon looks interesting in terms of valuation, although we remain concerned about the potential financing to fund its share of capital expenditure for the Dorado project.

* Contango is where the futures price of oil is higher than the expected future spot price – that is, traders will pay a premium to lock in a shipment at a given price several months away – according to supply.

Equity Ratings and Price Targets

Mkt Cap ($ mn) 3,193.87 307.57 577.46 5,859.54 7,842.57 10,498.65 Senex Energy SXY 467.20 Woodside Petroleum WPL 17,225.00

Price ($)

1.40 0.22 0.36 2.82 4.47 5.04 0.32

18.28

Rating
Cur Prev Cur

Buy Accum Hold n/c

Buy Accum Accum n/c

Buy Accum
Buy Accum
Buy Accum
Buy n/c 23.55

Price Target
Date Prev Date

Jun-21 2.25 n/c Jun-21 n/c n/c Jun-21 0.58 n/c Jun-21 3.50 n/c Jun-21 7.60 n/c Jun-21 7.50 n/c Jun-21 n/c n/c Jun-21 25.00 n/c

Company Ticker

Beach Energy BPT Carnarvon Petroleum CVN Cooper Energy COE Oil Search OSH Origin Energy ORG Santos STO

2.20 0.23 0.57 3.35 7.45 7.25 0.39

Source: Company data, Bloomberg, Ord Minnett estimates. n/c = no change. All prices as of 08 Oct 20.