Australian oil and gas: Value still here despite higher share prices

Mark Taylor  |   21st Oct 2022  |   10 min read

Energy prices are high and producer share prices up, but we still see upside

Woodside Energy (ASX:WDS), Santos (ASX:STO), and Beach Energy (ASX:BPT) have all benefited from rising oil and gas prices. However, despite share price appreciation, we think value still exists. And if energy prices remain elevated for longer than expected, value may be even greater. That’s possible given the energy crisis in Europe.

Of the three Australia-based oil and gas producers we cover, Woodside has the greatest exposure to global prices and has benefited the most from international events. For Woodside, only about 20% of production is attributable to domestic gas, where prices are steadier.

Beach by contrast has about 60% of production serving the domestic gas market, while Santos sits between those two at about 40%. Domestic gas has a number of positives, with capital intensity lower than for export gas, and pricing under term contracts with consumer price index escalators.

But lower margins and shorter field lives mean Beach is potentially more exposed to operating and capital cost inflation with less of the commensurate export pricing upside that Santos and especially Woodside enjoy.

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Key takeaways

  • Santos trades at a near-40% discount to our fair value, the market underpricing for Barossa gas and new oil project growth. Realised prices are below those for Woodside, but margins are comparable. Santos has longer field life and stronger production growth than peers and a still comfortable balance sheet. Returns were cruelled by GLNG cost overruns last decade. But new investments under the watch of CEO Kevin Gallagher have generated attractive returns.
  • Woodside shares trade at a circa 25% discount to our fair value, insufficient credit being given for Scarborough/Pluto T2. Strong realised prices reflect a favourable product mix and comparatively higher spot exposure. Returns on invested capital are tempered by liquid natural gas capital expenditures, including for Scarborough/Pluto T2. But returns should improve upon T2’s start up in 2026.
  • Beach is the cheapest of our Australian E&P coverage, the market too harshly discounting for comparatively shorter field life than peers and lesser export pricing exposure. Realised prices are low versus peers though the gap should narrow as internationally traded prices ease and Beach’s domestic gas contracts become more important. Short field life dictates material future capital expenditure and risks are somewhat higher in Beach, but the balance sheet is strong with net cash.

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