Event Core

On 15^th June 2022, the Australian Competition & Consumer Commission (ACCC) released a quarterly report on the Australian petroleum market for the March 2022 quarter. Key highlights of the report involve a cut in excise in late March 2022, higher international prices, retail prices registered at the highest level in the past 14 years, surged global prices, etc.

Key Takeaways

Key Petroleum Statistics

Increased Exploration Expenditure: The total expenditure on petroleum exploration rose by 7.6% or $23.9 million in March 2022 quarter to $340.0 million. Offshore petroleum exploration advanced by 35.4% or $42.8 million to $163.7 million. Australian crude oil and feedstock exports in FY22 are estimated to increase by 1.7% to 281,000 barrels/day.

Crude Oil Production: In FY22, Australian crude and condensate production is estimated to surge by 0.8% to 337k barrels/day. In FY22, the Australian crude and condensate export values are estimated to increase by 86% to $13.8 billion, primarily supported by high oil prices and robust production volumes, specifically for condensate.

Key Risks and Challenges

Petrol sales volumes across Australia reduced in the March 2022 quarter stood at 2,207 million liters, almost 4% lower than the previous quarter. Global airline travel has continued recovering but has not yet reached pre-pandemic levels, affecting jet fuel consumption. Organisation of the Petroleum Exporting Countries (OPEC) cartel portrays substantial influence on the petroleum price movements with production limits, raising price manipulation concerns. Furthermore, the current issues with labor shortages and global supply chain constraints raise macro concerns for the oil and gas industry.

Outlook

Positive Prospects for Aviation Fuels: Consumption for FY23 is expected to recover to pre-pandemic levels, primarily driven by growing demand for aviation fuels with Australia’s international border reopening.

Improved Global Oil Consumption: Global oil consumption is set to recover in 2022, with consumption expected to increase by 2.2% and to reach 100 million barrels/day relative to consumption of 98 million barrels/day in 2021.

Favourable Demand for Transportation Fuels: Demand for transportation fuels continues to recover, with solid growth expected for 2022 and early 2023. At the start of March, the road traffic in European cities measured 95% of pre-pandemic levels.

Raised Australian Crude and Condensate Export Values: In FY22, the Australian crude and condensate export values are expected to surge by 86% to $13.8 billion. Exports are further forecasted to rise slightly in FY23 amid the higher oil prices forecast for 2022 and 2023.

Soaring Export Prices: The soaring oil prices are expected to lift Australia’s export earnings by a substantial 86% to $13.8 billion in FY22.

Considering the developments in the oil and gas industry, we have figured out three stocks on ASX that are set to see momentum.

(1) ­­­­­­Washington H Soul Pattinson and Company Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 8.46 billion, Annual Dividend Yield: 2.77%)

This report is the updated version of the report uploaded on 20 June 2022 at 3:55 PM GMT.

Surged Construction Activities Raising Growth Prospects: ­­­Washington H Soul Pattinson and Company Limited (ASX: SOL) is an Australian-based investment company driving revenue through stakes in coal mining, gold, and copper mining, refining operations, and consulting services. In FY21, SOL registered $273 million in statutory NPAT, a decrease of 71% PcP. This was mainly led by $1 billion one-off gains realized in FY20. But regular NPAT surged 93% YoY attributed to growth in building products and favourable land revaluations, which increased Brickworks’ contribution by almost 95%. Substantial improvements in Round Oak, supported by $103 million, and robust recovery in the coal process bolstered New Hope’s profit contribution by almost 45% PcP.

IN H1FY22, SOL registered a regular group PAT of $343.7 million, up by 281% PcP and pre-tax net asset value advanced to $9.0 billion from $5.2 billion. Net cash flow from investments surged substantially to $182.6 million relative to $85.3 million. Brickworks, New Hope, and Round Oak Metals significantly contributed to the improved fundamentals. Higher dividends form the Large Cap equities portfolio, which expanded by $2.7 billion due to Milton acquisition.

Outlook: SOL is focused on building an actively managed portfolio of diversified businesses. The company remains active in portfolio transactions surpassing $5 billion in acquisitions and asset sales in H1FY22. SOL was a net seller ahead of recent volatility, improving liquidity by nearly $350 million. 

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)

SOL Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of SOL went down by ~12.937%. The stock made a 52-week low and high of $22.580 and $40.800, respectively. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight discount compared to its peers,considering international policy pressures and commodity market uncertainty. For valuation purpose, peers like Peninsula Energy Ltd (ASX: PEN), New Hope Corporation Ltd (ASX: NHC), Whitehaven Coal Ltd (ASX: WHC), and others have been considered. Considering the diversified business portfolio, decent fundamentals, expanding net asset value, current trading levels, and upside indicated by valuation, we give a 'Buy' rating on the stock at the current market price of $22.610, as of 20 June 2022, at 03:30 PM (GMT+10), Sydney, Eastern Australia. On the technical front, the stock has resistance level of AUD 24.871 & AUD 27.358 and support levels of AUD 20.526 & AUD 18.651.  

(2) ­­­Ampol Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 7.74 billion, Annual Dividend Yield: 2.90%)

Acquisition Regulatory Approvals Supporting Fundamental Prospects: Ampol Limited (ASX: ALD) is an Australia-based company engaged in infrastructure & fuel and convenience retail business. In FY21, RCOP EBIT climbed by 57% to $631 million against the COVID-19 backdrop. The company claimed a record total sales volume of 22.04 billion litres amid solid international growth. The balance sheet stood strong with leverage at 1.2x of RCOP EBITDA, with $479 million returned to shareholders.

In Q1FY22, the Replacement Cost Operating Profit (RCOP) EBIT increased by 44% and RCOP EBITDA climbed by 25% PcP. The robust shop performance was underpinned by an improvement in gross margin of 2.5 ppts. Total sales volumes stood at 4,586 million litres, and Australian sales volumes surged by 2.1% to 3,251 million litres. B2B sales advanced 14% relative to the previous year's period.

Outlook: As announced on 1 April 2022, ALD and EG have resolved the dispute about Fuel Supply Agreement. ALD has received all regulatory approvals pertaining to Z Energy. Since the end of Q1FY22, the product markets and global crude has continued to witness significant volatility, raising the market price of diesel and jet fuel.

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)

ALD Daily Technical Table (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of ALD went down by ~6.731%. The stock made a 52-week low and high of $25.760 and $37.550, respectively. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight premium compared to its peers, considering favourable price movements and high resilience from COVID-19. For valuation purposes, peers like Emperor Energy Ltd (ASX: EMP), Karoon Energy Ltd (ASX: KAR), and Stanmore Resources Ltd (ASX: SMR), and others have been considered. Considering the decent fundamentals, strong financial position, regulatory approval for merger, current trading levels, and upside indicated by valuation, we give a 'Buy' rating on the stock at the current market price of $31.075, as of 20 June 2022, at 12:30 PM (GMT+10), Sydney, Eastern Australia. On the technical front, the stock has resistance level of AUD 34.183 & AUD 37.601 and support levels of AUD 28.051 & AUD 25.330.  

(3) ­­­­­­Karoon Energy Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 972.65 million, Annual Dividend Yield: 0.00%)

Project Developments and Sanctions to Place Top-Line in Expansionary Zone: Karoon Energy Limited (ASX: KAR) operates as an oil & gas exploration company with investments in hydrocarbons covering Australia, Brazil, and Peru. In FY21, oil production from the Bauna Field clocked 3.14 million barrels at an average rate of 13,317 barrels of oil/per day. Oil revenue for the period stood at US$170.8 million, and the unit production cost was registered at US$25.11 per barrel. KAR recorded a statutory NPAT of US$4.4 million and an underlying NPAT of US$33.4 million.

In Q3FY22, oil sales stood at 0.99 million barrels, produced at an average rate of 11,723 barrels/day. Oil production from the Bauna Field in Brazil totalled 1.05 million barrels. The production stood 14% lower than the previous quarter, primarily attributed to the eight-day shut down for scheduled maintenance and natural decline. Cash and cash equivalents as of 31 March 2022 stood at US$200.4 million, and undrawn & available debt stood at US$130.0 million, catering for total liquidity of US$330.4 million.

Outlook: The unit production costs in H2FY22 are expected to increase relative to H1FY22, reflecting curtailed production due to shut down for maintenance, natural decline, and the commencement of Bauna intervention work. In H1FY22, KRA recognised a surge in the fair value of the contingent consideration payable to Petrobras for Bauna to US$183.8 million (pre-tax) due to rising oil price expectations.

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)

KAR Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of KAR went down by ~11.170%. The stock made a 52-week low and high of $1.110 and $2.420, respectively. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight discount compared to its peers, considering curtailed oil production guidance for FY22. For valuation purpose, peers like Emperor Energy Ltd (ASX: EMP), Central Petroleum Ltd (ASX: CTP), and Calima Energy Ltd (ASX: CE1)have been considered. Given the decent production performance, improved activities in Bauna Fields, current trading levels, and upside indicated by valuation, we give a 'Speculative Buy' rating on the stock at the current market price of $1.6275 as of 20 June 2022 at 12:30 PM (GMT+10), Sydney, Eastern Australia. On the technical front, the stock has resistance level of AUD 1.7903 & AUD 1.9693 and support levels of AUD 1.4742 & AUD 1.3362.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical issues prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock of the Target Price mentioned as per the Valuation has been achieved and subject to factors discussed above.

---

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine and its related entities do not hold interests in any of the securities or other financial products covered on the Kalkine website unless those persons comply with certain safeguards, procedures, and disclosures.

Kalkine Media Pty Ltd, an affiliate of Kalkine Pty Ltd, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.