Credit Suisse analysts say the Australian oil and gas sector faces massive writedowns if oil prices stay at long term lows expected by BP’s top brass who said they will slash up to $US17.5 billion ($25 billion) off the value of the UK energy major’s assets.
BP expects the COVID-19 pandemic will have a lasting impact on the global economy and on oil and gas demand and as a result its management now assumes an average of about $US55 a barrel for Brent crude, down from $US70/bbl.
Australia’s oil and gas producers have dug in for a long haul on prices with Woodside Petroleum, Santos and Oil Search slashing capex budgets, and delaying billions of dollars of new projects.
BP is the first energy major to account for a permanent oil drop in price but many companies, investors and analysts are more optimistic and still expect a rebound in the market.
Romano Sala Tenna, portfolio manager at Katana Asset Management is bearish on the short term oil price, but cautiously expects the market to rebalance as demand improves.
“Mass project cancellations during the pandemic, due to the oil price collapse, means the market will be undersupplied when the economy [opens up],” he said.
UBS analysts are also optimistic, factoring in earnings upgrades on the broker’s prior estimates of 10-12 per cent for the local oil and gas sector based on a long term oil price rebounding to $US60/bbl.
Still, if BP’s downbeat forecast came to pass it would wipe billions of dollars from the market values of ASX-listed local oil and gas companies and result in major projects being put on ice forever, Credit Suisse modelling shows.
Valuations in jeopardy
Woodside Petroleum’s market value would be slashed by more than $2 billion, or about 11 per cent, according to Credit Suisse’s assessment of a long term oil price drop from the broker’s expected $US60 a barrel to BP’s predicted $US55/bbl.
More than a billion dollars – or about 15 per cent – would be wiped off the market value of Santos. Oil Search’s value would fall by about 16 per cent and Beach Energy’s by about 7 per cent or a quarter of a billion dollars.
The analysts singled out Woodside and Santos as particularly at risk if a long term drop in oil price became a reality because they both assume the average oil price will stay close to $US70/bbl.
Graeme Bethune from the Adelaide-based consultancy EnergyQuest said the dramatic crash in prices since the collapse of the “OPEC-plus” alliance between the producer cartel and Russia as well as a demand drop off from coronavirus made it difficult to predict oil prices, but BP’s reassessment brings it closer to reality.
“We’ve seen the price of Brent flux widely over the last two months from $US9 to over $US40 today so what should a company use for its assumptions?”
“BP’s forecasts were at the top end of assumptions at $US70, bringing the forecast down to $US55 brings it closer to reality.”
Checked against the Brent forward pricing curve, the long end is $US55/bbl in 2028 , which is consistent with BP’s assessment, Mr Bethune said.
“Woodside, Santos and Oil Search all report towards the end of the year so there is still time for them to see if the oil market settles down or not.”
BP’s assumptions for oil prices are the lowest among its peers, analysis from Westwood Global Energy Group shows. US oil and gas majors Gran Tierra and Talos are far more bullish, predicting $67.5/bbl, while Spain’s Repsol is currently using $US65/bbl for 2020 rising to $US74/bbl in 2025.
BP’s move is the biggest recognition yet among the largest oil and gas players that tens of billions of dollars worth of oil and gas investments could become unprofitable as the world pursues the Paris climate goals.
“These difficult decisions – rooted in our net zero ambition and reaffirmed by the pandemic – will better enable us to compete through the energy transition,” BP’s new chief executive Bernard Looney said in a statement explaining the multi-billion dollar writedown on Monday.
Credit Suisse analysts say they are seeing a notable divergence of views on the future for oil between bullish US oil and gas giants and bearish European majors who have more of a focus on moving away from fossil fuel exploration.
Australian oil and gas is “unsettled on the long-term outlook” but may end up “somewhere in the middle, probably towards the more bullish end,” which could mean Australian energy companies could snap up discarded European fossil fuel assets.
Woodside is best placed to take advantage of European majors wanting to sell, they say, but whether the company has the “internal will and capability to execute remains uncertain to us as much of the seasoned M&A expertise has moved on.”
UBS analysts align with the US majors, offering a far more bullish view than BP’s management. UBS analysts Glyn Lawcock, Tom Allen and Joseph Wong predict a wave of earnings upgrades on the broker’s prior estimates between 10-12 per cent will sweep across Australian oil and gas companies, based on an oil price rebound in the near term of $US42.50/bbl in 2020 and $US50/bbl in 2021. They predict the oil price will hit $US60/bbl in the long run.
“This reflects the faster market recovery through May/June as ‘tank-tops’ was avoided, but reflects our continuing view that working off the high market levels of inventory and bringing back OPEC+ spare capacity into service will take time,” the analysts said.
The predicted higher oil price means Woodside’s 2020-21 earnings will jump 38-77 per cent while Santos’ earnings will be 13-45 per cent higher in 2020-21 from the oil price upgrade. As Oil Search’s earnings are the most levered to oil price, they expect the broker’s oil price change results in upgrades of 70 to 100 per cent through 2020-21, making the company profitable in 2020.
The analysts also upgraded Origin’s earnings forecast by 1-41 per cent to reflect the higher oil price forecast but note only half of Origin’s earnings are exposed to oil price.
Extracted from AFR