Citigroup has dramatically slashed its forecasts for crude oil prices, triggering a massive hit to earnings estimates for some Australian oil and gas producers and pushing some players into the red.
The bank now expects
Brent crude oil, the global benchmark, to average just $US63 a barrel this year, some 22 per cent down on its previous forecast. 2016 price estimates have been cut ,almost as deeply, by 18 per cent to $US70.
While Citi also pared back its assumptions for the Australian dollar, softening the hit to earnings estimates, the impact is severe on earnings estimates.
Its estimate for the 2015 financial year profit for Santos has been cut by 77 per cent, for Oil Search by 40 per cent, for Origin Energy by 8 per cent.
Some smaller companies are even worse off, with Senex Energy earnings estimate for 2014-15 ratcheted down by 87 per cent and AWE now seen slumping to a full-year net loss.
Even so, Citi’s energy equities team led by Dale Koenders says share prices have over-reacted to the oil price slump, resulting in “attractive” buying opportunities for investors.
Although it has cut its recommendation on Beach Energy to “neutral” from “buy”, it has kept “buy” calls on Origin,
Santos, Senex, AWE and Karoon Gas Australia. Citigroup is currently restricted on publishing comment on Woodside Petroleum given its advisory role in Woodside’s $US3.75 billion deal struck in December with Apache.
More ‘buy’ recommendations than ‘sell’
“Our stock recommendations remain skewed towards a Buy (5 Buys, 2 Neutral, 0 Sells), as we think share prices are over-reacting to spot prices and we expect a recovery in prices longer term,” the analysts said.
In contrast to analysis published earlier this week by Credit Suisse, Citi calculates that current share prices are inferring weaker-than-expected oil prices into the future, of just $US48 a barrel for Karoon Gas, for example.
Citi cites beleagured Santos, whose shares have sunk more than 50 per cent since August, as its top pick among larger ASX-listed oil and gas stocks, followed by Oil Search.
Among the juniors, Karoon is its favourite, followed by AWE, Senex, then Beach. In utilities, it favours AGL Energy over Origin.
Global oil prices stabilised overnight Australian time, with Brent crude flat at $US51.10 a barrel, still down from $US115 as recently as June. West Texas Intermediate, the US standard grade, rose 1.9 per cent to $US48.83.
Citi also cut its long-term oil price estimate by 17 per cent to $US75 a barrel from $US90.
On the Australian dollar, the bank is now assuming an exchange rate of US79.5¢ this calendar year, softening to US77.5¢ next year. Its long-term forecast, from 2017, is for US75¢.
Despite the positive comments on the attractiveness of the sector for investors, Citi also markedly cut its target prices for some stocks, including a 16 per cent cut for Oil Search, 15 per cent for Santos and 11-14 per cent for smaller players such as Beach, Senex and AWE.
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