- 2019 Reflection: It was a tough year for oil stocks in 2019, and this performance was in sharp contrast to the performance of oil, which was the second-best performing commodity in 2019 with a 34.46% gain (2018 -24.84%). Some oil stocks in the North American market struggled over the year due to increased oil price volatility which created uncertainty, and as a result investors stayed on the sidelines. The US shale sector has entered unknown territory with rig counts falling and bankruptcies increasing. Even though rig counts are down circa 25% over the year, with the largest fall in the Permian Basin, US crude production continues to climb. Growing US production created the spectre of crude oversupply in 2019, a situation which OPEC attempted to counter with production cuts.
- In contrast to the weaker North American listed energy stocks, Australian large-cap energy stocks performed well in 2019. Woodside gained a respectable 11.2%, Oil Search 10% and STO an impressive 57% and overall, the ASX energy index gained 19%. Despite challenging sentiment towards hydrocarbons, Australian investors had a good 2019 in the oil patch. The discovery of deep gas resources in the Perth Basin by Strike Energy (STX) has reinvigorated exploration in the basin.
- 2020 Outlook: The global picture for oil prices seems to have improved for the year even though there is short term volatility as the world weighs up the potential impact of the coronavirus. The tensions with Iran seem to be receding but could flare up threatening 2/3 of global seaborne oil supply that passes through the Strait of Hormuz. The ongoing de-escalation of the trade war will increase oil demand as China economic growth potentially begins to improve. We also believe that ESG (Environmental, Social, Governance) issues with a particular focus on emissions, will be an ongoing theme and the industry will need to address these impacts.
- Australian Oil and Gas stocks are somewhat disconnected from global oil markets due to their large exposure to Asian LNG markets and the high priced East Coast Gas markets. Our top picks in the sector are Santos (STO) and Woodside (WPL).
- WPL is trading on a consensus 7.5x FY1 EV/EBITDA and a forward yield of 4.1%. It is in the early stages of an expansion of the Pluto facility, and development of the Browse field. We expect these two projects be sanctioned and progressed in 2020. STO trades on a consensus FY1 EV/EBITDA of 6.2x and a forward yield of 2.3%. STO recently acquired ConocoPhillips northern Australian assets and will be working towards the development of the Dorado field off the coast of northern WA.
- We are expecting 2020 to be a busy year in WA, with several ASX players are planning drilling programs in the Perth Basin. Strike Energy (STX) with its partner Warrego (WGO) and Mineral Resources (MIN) will be further exploring the newly opened deeper parts of the basin. Metgasco (MEL) will be drilling a well targeting oil and Triangle (TEG) is working on a near field exploration program at Cliffhead. The expected elevated level of activity from the large caps down to the smaller end of the market should give investors plenty of investment opportunities in 2020.
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