Criterion columnist
Melbourne
Oil’s well that ends well?
Thanks to barebacked he-man equestrian Vladimir Putin, the outlook for the oil price is at its most bullish since the explosion in US shale output torpedoed the commodity two years ago.
Have we finally seen the bottom for the world’s most important substance apart from water?
The outlook is certainly much more conducive for our oil and LNG producers, although there have been plenty of false starts already on the grinding recovery path.
At the World Energy Congress in Istanbul overnight, Putin said Russia — the world’s biggest non-OPEC oil producer — would support OPEC’s commitment to curtail production by 700,000 barrels a day to 32.5-33 million barrels.
However a formal compact isn’t expected until the 14 OPEC member nations meet in Vienna late next month and history suggests these agreements can be fluid.
Brent crude oil — the international benchmark — climbed $US1.21 a barrel or 2.3 per cent to $US53.14 a barrel, the highest close since August last year.
Most pertinently for Australian energy stocks, LNG spot prices are also at nine-month highs.
Meanwhile, US shale output is running at 8.5 million barrels a day, well below its June 2015 peak of 9.6 million barrels. The country’s crude inventories are also reportedly down 3mb on the week, compared with consensus expectations of a 2.6mb gain.
According to UBS, Oil Search has the lowest break even at $Us26.7 a barrel (in a free cash flow basis including discretionary expenditure), followed by Woodside ($US31.20) and Santos ($US42.60).
On an earnings per share basis, there’s a wide sensitivity to the underlying oil price.
According to UBS, Woodside would generate US100c of EPS with a $US50 a barrel oil price compared with US133c at a $US60 price.
For Oil Search, EPS would vary between US12c and US23c. For Santos the difference is even more dramatic: US7c versus US20c.
The price improvement comes amid an expected uptick in LNG exports as newly commissioned projects find their stride.
According to the consultancy EnergyQuest, the Australian projects should produce 47 million tonnes in 2016-17, compared with 37.5mt last year
Ahead of today’s opening Santos shares had tumbled 69 per cent over the last two years, while Woodside and Oil Search shares were 23 per cent and 10 per cent off the pace respectively.
BHP Billiton, by the way, has hit the trifecta with recovering oil and iron ore prices and surging coking coal values.
* The Australian accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser. The author owns BHP shares.
AOW Price at posting:
10.0¢ Sentiment: Buy Disclosure: Held
