Updated December 09, 2015 21:28:44

Australian investors in oil and gas companies who have been watching in dismay the collapse in value of their holdings are unlikely to be comforted to know the organizations are nevertheless way overvalued compared to present spot prices.

This might be hard to fathom given the outsized hit Australian drillers have taken since the news that unity in the OPEC cartel had fractured and there would be no action to rein in production.

In a globe already awash with oil and facing the prospect of a sanctions-free Iran re-entering the market place with another 700,000 barrels a day, OPEC’s failure to take action final week saw costs crash to levels not observed since late 2008.

As Brent crude tumbled 7 per cent to just around $ US40 a barrel, the likes of Santos and Oil Search fell a lot more than 20 per cent in just two days, whilst Woodside was down 8 per cent.

Oil Search’s fall was exacerbated by Woodside’s choice to abandon take over plans.

On the other side of the failed deal, there was relief that Woodside was not about to do anything stupid by over paying for the PNG focussed producer, which almost certainly protected it from far far more acute pain.

Current share rates justify oil at $ US60 a barrel: UBS

Nevertheless the industry is nevertheless valuing the companies on oil costs of around $ US60 a barrel, 50 per cent above existing spot costs.

On UBS figures, Oil Search trading at its current worth of about $ six.34 implies an oil cost of $ US63 a barrel.

Woodside’s current price tag implies oil at $ US58 a barrel and Santos $ US56 a barrel.

Alternatively, UBS finds at the existing spot value, the Santos share cost of $ three.31 crashes 89 per cent to 37 cents per share with a protracted period at $ US40 a barrel.

Oil Search does not fare much far better with its value tumbling 83 per cent from present levels of about $ six.29 per share to a fair worth of $ 1.04.

Woodside seems to be much less leveraged to movements in oil rates, but would still decline 42 per cent from around $ 27 a share to $ 15.50.

‘$ US40 a barrel generates tiny earnings for Oil Search’

Morgan Stanley’s Stuart Baker approached the very same query from a distinct angle, looking at the effect of a $ US40 a barrel cost on balance sheets and money flows and the news was not considerably far better.

For Santos, the news would be bleak — no earnings or dividends.

Woodside — which does not face important debt repayments till 2019 — would also nonetheless be in a tight spot.

Mr Baker said under his modelling Woodside would be loss making and pay no dividends.

Nevertheless, Woodside could turn out to be money flow good in 2017 after its existing spending on the Wheatstone project is comprehensive.

Mr Baker identified Oil Search would be slightly cash-flow damaging, but does have spare liquidity of $ US1.six billion to aid battle through a prolonged downturn.

“At $ US40 a barrel (Oil Search) generates little earnings — $ US95m in 2016 and $ US51m in 2017 — [even though] dividends would be negligible,” he mentioned.

Mr Baker also threw Origin Power into the mix and discovered that it is defensive earnings stream from power and energy retailing would assist service dividends although production in the $ 25 billion APLNG system was nevertheless two years away from reaching its money flow possible.

Nonetheless, right after paying APLNG’s debt and interest, the project’s breakeven position for positive cash flows is between $ US38 and $ US42 a barrel.

UBS, Morgan Stanley count on oil value to recover

Neither UBS nor Morgan Stanley have $ US40 as a base case and each anticipate the price to recover.

UBS analyst Nik Burns stated with OPEC not offering any assistance, the industry is most likely to stay physically oversupplied with oil until late 2016.

It is a view shared by the International Power Agency which recently cut its forecast for worldwide demand by 150,000 barrels a day.

Mr Burns stated if OPEC returned to getting a cohesive cartel, prices could rebound to about $ 70 a barrel, but this was unlikely.

There are nonetheless significant headwinds that could push the price tag lower.

Storage in each the US and China is practically at capacity as super-tankers park for days off refineries to unload the increasingly less precious cargoes.

A 1 per cent stumble in Global GDP would reduce worldwide demand by about 500,000 barrels a day and probably add an additional year to rebalancing the out-of-whack supply and demand equation.

Iran returning to the marketplace faster than anticipated could also push the oil glut nicely into 2017.

Mr Burns stated primarily based on UBS figures, if Chinese GDP development came in at four to five per cent rather than 6 per cent and above, the reduce in demand would be adequate to push down prices by $ US5 to $ US10 a barrel.

“This signifies there could be a lot more oil price pain in the brief term, but the incentive value for new oil investment is above $ US60 per barrel in our view,” Mr Burns stated.

“So there is light at the finish of the tunnel.”

‘Oil could drop yet another 50 per cent’

However all this is positively rosy compared to the view across the road from rival investment bank Goldman Sachs which not too long ago forecast oil could drop by yet another 50 per cent to $ US20 a barrel.

Goldman Sachs’ reasoning argues a mild northern winter, slowing emerging industry development and Iran maybe enough for the surplus to breach storage capacity.

An further issue is that with technological advances continuing to cut oil producers’ reduce cash enabling, there is significantly less of an incentive to throttle back on production.

With capacity breached and oil splashing about everywhere the price would seriously crash.

That could break balance sheets, undermine financing bargains and destroy investors’ faith, then the entire question of weathering the storm grow to be a complete lot tougher.

Subjects: organization-economics-and-finance, markets, oil-and-gas, industry, australia

Initial posted December 09, 2015 20:48:56

Agen Sabung Ayam