I. Sector Landscape
Australia’s Oil, Gas & Energy Sector seeks substantial opportunities owing to surged domestic demand for electricity generation and the subsequent escalation of urbanisation. Australian energy industry remained resilient from COVID-19 headwinds and created $324 million in GDP for every petajoule of energy consumed in 2020. This is compared to $50 million created over a decade ago.
Mineral and Petroleum Exploration
Mineral Exploration: Total expenditure on mineral exploration stood at $921.5 million in December 2021 quarter relative to $743.1 million in December 2020 quarter. Existing deposits slipped by 1.8% to $647.4 million and new deposits shrunk by 9.6% to $305.9 million. However, meters drilling reached 3,154, up from 2,971 meters in December 2020 quarter.
Petroleum Exploration: Total expenditure on petroleum exploration advanced by 8.3% sequentially to $314.1 million. All other areas surged by 13.4% sequentially to $204.6 million, and production lease areas stood flat at $109.5 million.
Figure 1: Mineral and Petroleum Exploration
Source: Based on Australian Bureau of Statistics, Analysis by Kalkine Group
Growth Prospects in Oil, Gas, and Energy
Driving Indicators for Oil: In 2021, global oil production is expected to surge by 1.5% relative to 2020 levels, to 95 million barrels a day. In FY21, Australian crude and condensate production slipped to 334,000 barrels/day, a dip of 10.1% from FY20. Condensate output was unfavourably affected by the Prelude FLNG project going temporarily offline.
Figure 2: Crude Oil Annual Volume of Commodity Exports
Source: Department of Industry, Science, Energy and Resources, Analysis by Kalkine Group
Resilient in Australia’s LNG Segment: Australia’s export volumes have manifested resilience throughout the COVID-19 pandemic, with movements in export volumes mainly explained by routine maintenance and technical issues. Australia’s LNG exports clocked 21.4 million tonnes, up by 14.4% QoQ and 16.2% YoY. The productivity surge was driven mainly by resolving issues at Gorgon, Ichthys LNG, and Prelude plants in the June quarter.
Energy Update: Energy retailers have commenced a campaign to raise awareness amongst small businesses and households of support for those experiencing financial distress during COVID-19. The Australian Energy Market Commission (AEMC) 2021 annual residential electricity price trends showcase that households can expect to pay close to $77 less for electricity in 2024.
Index Performance
ASX 200 Energy (GIC) have generated a 2-year return of ~+85.74%, compared to ~+55.99% return by the ASX 200 Index. Increasing exports of the resources sector, favourable pricing across most minerals, and recovering business sentiments drove the sector gains.
Figure 3: The ASX 200 Energy (GIC) Index outperformed ASX 200 Index in the past 2 years by ~29.75%.
Source: REFINITIV as of 24 March 2022
Key Risks and Challenges
Australian refinery consumption fell in FY21, as containment measures amid COVID-19 continued to weigh on activity. Australian refined oil output slipped by 15.8% in FY21, driven by fierce international competition and low transport demand weighing on profitability. The global supply chain constraints have significantly affected the oil & gas industry. Prelude FLNG has witnessedvi significant production disruptions and stood offline between February 2020 and January 2021. The regulatory influence in electricity pricing strategies has significantly reduced the retail and wholesale price, affecting suppliers’ top-line.
Figure 4: Key Drivers v/s Key Constraints
Source: Analysis by Kalkine Group
Outlook
Improved Forecasts for Crude Oil Exports: Australian crude oil and feedstock exports in FY22 are estimated to increase by 11% to 306k barrels/day. High oil prices are expected to push Australian oil export earnings by +69% to $12.6 billion in FY22.
Increase in Global Oil Consumption: The global oil consumption in 2021 is expected to have averaged 96 million barrels/day, up by 5.7% from the 2020 level. Easing containment measures and rebounding in economic growth has aided robust demand growth in 2021.
LNG Export Earnings on a Rise: Australia’s LNG export earnings are expected to rise from $30 billion in FY21 to $63 billion in FY22, as oil-linked contract prices improve. Export earnings are estimated to be $55 billion in FY23.
Victoria promoting Renewable Future: Cheaper wholesale prices have curtailed the cost of supplying electricity to households. Retailers have initiated to pass the savings on to customers.
New Regulations to Support Offshore Electricity Infrastructure: Parliament endorsed an array of new rules and regulations to support Australia’s offshore energy industry development and explore investment in offshore wind farms and transmission projects.
II. Investment theme and stocks under discussion (VEA, BOE, ERA)
After understanding the sector, let us now look at three companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘Price/Earnings’ and TTM multiple methods.
1. ASX: VEA (Viva Energy Group Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$3.56 billion)
VEA is engaged in the manufacturing, distribution, and supplying petroleum products to retail and commercial customers.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 17.53% on 24 March 2022. However, we believe that the stock might trade at a slight premium compared to its peers’ average Price/Earnings (NTM trading multiple), given recent spike in commodity prices and resurging supply chain. For valuation, peers such as Ampol Ltd (ASX: ALD), Senex Energy Ltd (ASX: SXY), Cooper Energy Ltd (ASX: COE), and others are considered. Considering the long-term fuel security package, completed front end engineering design of the Gas Terminal Project, current trading levels, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the closing market price of $2.290, down by ~0.435% on 24 March 2022. In addition, the stock has delivered an annualised dividend yield of ~3.19%.
VEA Daily Technical Chart, Source: REFINITIV
2. ASX: BOE (Boss Energy Limited)
(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$806.05 million)
BOE is engaged in exploration and feasibility studies on Honeymoon Uranium Project in South Australia.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 19.88% on 24 March 2022. Moreover, the stock might trade at a slight premium compared to its peers’ average Price/Earnings (NTM trading multiple) given the two-fold strategy on improving Honeymoon’s production profile. For valuation, peers such as Washington H Soul Pattinson and Company Ltd (ASX: SOL), Senex Energy Ltd (ASX: SXY), Woodside Petroleum Ltd (ASX: WPL), and others are considered. Considering the greenfield exploration prospects and upgraded the satellite JORC resources, current trading levels, and upside indicated by valuation, we give a “Speculative Buy” recommendation on the stock at the closing market price of $2.430, up by ~1.673% on 24 March 2022.
BOE Daily Technical Chart, Source: REFINITI
3. ASX: ERA (Energy Resources of Australia Limited)
(Recommendation: Hold, Mcap: A$1.32 billion)
An ERA is engaged in the business of mining, processing, as well as selling uranium oxide.
Technical Analysis:
On the daily chart, ERA is currently trading above the trend-following indicator 50-period SMA, placing it as a good support level. However, it is trading along with its 21-period SMA levels, it might follow an upside trend it the price sustains above the SMA. Further, the momentum oscillator RSI (14-period) is trading at ~50.979 level, indicating a directionless movement. An important resistance level for the stock, is placed at AUD 0.400 while the key support level is placed at AUD 0.330.
Valuation
The stock of ERA gave a negative return of ~47.917% in the past year. The stock is currently trading slightly lower than the 52-weeks average price level band of $0.195 - $0.580. On a TTM basis, ERA has an EV/Sales multiple of 8.3x compared to the industry median (Energy) of 21.5x. Given the rehabilitation of the Ranger Project Area, current trading levels, undervaluation indicated by TTM valuation, and key risks associated with the business, we give a “Hold” recommendation on the stock at the closing market price of $0.355, down by ~1.39%, as of 24 March 2022.
ERA Daily Technical Chart, Source: REFINITIV
Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
Note: All the recommendations and the calculations are based on the closing price of 24 March 2022. The financial information has been retrieved from the respective company’s website and REFINITIV.
Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and is subject to the factors discussed above.
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