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Analyst report
Analyst puts buys on two energy stocks
March 26, 2008
Brendon Lau, ShareAnalysis
While crude oil has been hitting a string of record highs, we believe crude could be in for some profit taking ahead. As some oil stocks are impacted by crude prices, timing your entry into these stocks with the commodity could be well worth the effort.
However, not all oil stocks show a significant historical correlation to crude, and currently the sector is also impacted by the credit jitters. The good news is that the sector could be one of the first to recover as these jitters dissipate. Having said that, Caltex Australia (CTX) seems to be one of the least correlated with crude.
But that is not surprising, as CTX is a refiner and not an oil producer and has not benefited from the recent surge in crude oil prices. In fact, CTX has been the worst-performing energy stock in the Aegis 200. This is primarily due to the squeeze on its refining margins from the strong Australian dollar.
Overall, though, the energy sector has performed very well. Since the start of the year, the sector has outperformed the S&P/ASX 200 index by about 12% as investors increasingly regard energy and mining stocks as the new "defensives" amid the ongoing credit crisis.
This view has been propagated by fresh fund flows into almost every commodity asset, including crude oil, as investors seek alternative investment classes to shelter from rising inflation, plunging equities and the weak US dollar.
The reason we think crude prices could whip around wildly is because its leap over the US$100/barrel barrier is largely due to speculative and technical buying exacerbated by the dramatically faltering US dollar.
Since commodities are priced in US dollars, the weakening greenback makes commodities cheaper in other currencies and that is why metals and oil prices tend to move in the opposite direction to the US currency. If the US dollar recovers along with the US economy in 2H08, as Fed Chairman Ben Bernanke and other economists are predicting, then crude could be knocked off its record perch.
Even before that, crude could face some fierce profit taking, as the fundamentals supporting crude played a relatively small part in its dash across the landmark US$100 level. Furthermore, a number of factors that have fuelled crude's stellar rise over the last six months are temporary in nature, such as geopolitical tensions, bad weather and refinery outages. The recent build in US crude and gasoline inventories could also weigh on prices in the near term.
Having said that, we are definitely not giving up on our positive outlook on crude and our conviction is reflected in the number of BUYs we have in the Energy sector. Regardless of a US recession, we believe demand for fuel and energy will remain at elevated levels for the foreseeable future, thanks largely to the seemingly unwavering growth in emerging economies.
As mentioned initially, if you are planning on investing in the sector, you might like to wait for crude to ease on profit taking as that could trigger a similar move on oil stocks. If you are worried that a slide in crude prices might lead us to downgrade the sector, rest assured that we have erred on the side of caution - the crude price used in our models is substantially lower than current spot prices.
Out of the several BUYs we have in the sector, two stocks we like to highlight are Woodside (WPL) and Santos (STO).
WPL and STO are the two largest companies in the sector that have been negatively affected by the rising A$/US$ exchange rate. WPL's FY07 NPAT fell despite a jump in revenue. Underlying FY07 NPAT was $1,269.1M, 9% lower than FY06. Higher exploration expenses and increased depreciation also affected the result. We are concerned about WPL's aggressive LNG strategy, which may strain its finances, but we expect a substantial uplift in FY08 revenue and NPAT due to increased production and high energy prices.
Meanwhile, STO's underlying NPAT was $485.1M, down 29% on the pcp, while sales revenue was $2,488M, down 8% on the pcp. We see STO's future as being in its LNG projects, which we believe will transform the company, doubling NPAT from 2014 onwards. We have a BUY on both stocks.
Brendon Lau is the editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research. Click here for your free trial.
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Sectors: Analyst puts buys on two energy stocks
Commodities: Should you worry about higher oil?
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Markets: Now central banks are buying investment banks?
Commodities: Opportunities arise from gold price plunge
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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