2 under-valued Aussie oil majors
Morningstar has reaffirmed its outlook for Australia's top two oil and gas companies after they released third-quarter production figures.
Morningstar has reaffirmed its outlook for Australia's top two oil and gas companies after they released third-quarter production figures.
Woodside Petroleum (ASX: WPL) reported revenues that were lower than expected for the quarter ended September 2018. This prompted Morningstar's senior equity analyst Mark Taylor to reduce his 2018 earnings per share estimate by 4 per cent, to $2.12 from $2.20.
"This was in part due to volumes being tempered by the timing of Woodside’s equity sales, and they will be made up for," he says.
By contrast, his 2019 EPS forecast for Woodside is up 24 per cent, and his $46.50 fair value estimate is unchanged.
Ongoing oil and gas price strength continue to support Woodside and Santos performance
"We now assume a 2019 Brent crude price of US$82 per barrel and an Australian / US dollar exchange rate of 0.71.
"Longer-term assumptions, including a US$60 per barrel mid-cycle Brent crude price, substantially remain," Taylor says.
Woodside's disappointing price achievement from its Pluto LNG project – almost $2 below Morningstar's target price per million British thermal units – was among the negatives.
"We hope this is just an anomaly," says Taylor.
On the upside, he points to its selection of the contractor for its second Pluto LNG train, and further progress on the Browse Basin project.
"These elements overall constitute about $6.50 or 14 per cent of our Woodside fair value estimate, so there is considerable comfort in their continuing progress," Taylor says.
Slashed among Santos' positives
Australia's second-largest oil and gas player, Santos (ASX: STO), has also retained its fair value estimate. Morningstar increased this by 12 per cent last month after management "laid out the path by which it intends to grow group production to 40 million barrels of oil equivalent", says Taylor.
Santos increased its third-quarter production by 6 per cent to 15 million boe, in line with Morningstar's expectations.
In addition to his broader sector assumptions on oil price, Taylor points to the company's ongoing debt reduction – which is more than 12 months' ahead of schedule.
The proposed Quadrant acquisition also factors into Morningstar's fair value estimate, which will add 19 million boe per annum if approved – an outcome Taylor believes is more likely than not.
While he notes this additional production is already factored into his modelling, other proposed deals, including the Doradoand Barossa LNG projects, are not.
"We think waiting for greater clarity on these projects prudent before crediting full value. But the market’s even more dovish position overly discounts CEO Kevin Gallagher’s growing record for delivery, in our opinion," Taylor says.
Santos was trading at $6.89 at 3pm Tuesday, slightly below Morningstar's $7.85 fair value estimate.
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Glenn Freeman is senior editor at Morningstar Australia.
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