Event Core
In FY21, the five largest cities’ annual average retail petrol prices (Melbourne, Sydney, Adelaide, Perth, and Brisbane) declined by 4.9 cents per litre (cpl) relative to FY20 and stood at 129.7 cpl. In real terms, the annual average retail prices were recorded at their lowest in the past 22 years. However, daily average prices remained relatively stable in H1FY21 following a record low in April 2020. International refined petrol prices, influenced by international crude oil movements, and the AUD/USD exchange rate, largely determine the retail petrol price in Australia.
Figure 1: Petroleum Price Record and April 2020 Downfall in Cents Per Litre (cpl)
Source: Based on Department of Industry, Science, Energy and Resources Data, Analysis by Kalkine Group
Petroleum Exploration and Mining Activities in Australia
Update on Petroleum Exploration Activities: Total petroleum exploration expenditure declined by 8.4% QoQ and stood at $248.9 million; however, recovery seems decent with a 17.5% PcP uptick. Onshore petroleum exploration activities clocked $165.1 million, marginally down by 2.9% QoQ and considerably up by 13.9% on a PcP basis. Similarly, offshore exploration activities clocked $83.8 million, down by 17.5% QoQ and considerably up by 25.1% on a PcP basis.
Figure 2: Petroleum Exploration Expenditure Trend:
Source: Based on The Australian Bureau of Statistics Data, Analysis by Kalkine Group
Significant Updates of Petroleum Market
Surged International Prices: Major uptick in average retail petrol prices was influenced by 7.7 cpl incline in Mogas 95 prices. The marginal decline in AUD/USD exchange rate further leads to a compounding effect on petrol prices. In June 2021 quarter, Mogas 95 accounted for a 44% weight in retail petrol prices. Australia’s total sales of petroleum products stood at 52,987.7 ML in FY21 relative to 56,947.2 in FY19.
Figure 3: Total Sales of Petroleum Products
Source: Based on Department of Industry, Science, Energy and Resources Data, Analysis by Kalkine Group
Gross Indicative Retail Differences (GIRDs): In June 2021 quarter, average GIRDs in the five largest cities stood at 14.8 cpl, a decline of 1.0 cpl on a sequential basis. GIRDs declined in past three consecutive quarters, partly reflecting upscale in petrol sales volumes. However, in March and June 2021 quarter, sales volumes were circa 8% higher than the average quarterly sales volume in 2020.
Regional Prices Stood Lower: In June 2021 quarter, average regional prices stood at 141.0 cpl, 1.0 cpl lower than the average prices witnessed in the five largest cities. Average retail prices in Darwin, Caires and Armidale were lower than the average retail petrol prices in the five largest cities for the fourth consecutive quarter.
Key Statistics on Electricity and Gas Running Utility Businesses
COVID-19 Hardships: Amidst the beginning of COVID-19 turmoil, the customer count on electricity and gas payment plans declined and sought resurgence from July 2020. For the March 2021 quarter, the disconnection count stood at 7,036 relative to 18,321 PcP. Average hardship debt for both electricity and gas surged by 25%.
Market Contracts Overshadow Standing Offers: Proportion of customers on market contracts inclined relative to more expensive standing offers. For example, in the ACT, market contracts accounted for 71% of total residential electricity customers in March 2021, relative to 61% PcP.
2020 Production Updates: Eastern Australia clocked 2,000 PJ gas production, wherein 68% accounted for exports in the form of LNG, while the remainder was designated to cater domestic market. Queensland’s Surat-Bowen Basin supplied circa 76% of gas production in Eastern Australia. The Northern Gas Pipeline, inaugurated in January 2019, delivered an average of 56 TJ/day - ~62% of total capacity.
Commercial Aspects of Gas: Customer counts on hardship program as of 30 March 2021 was registered at 13,983 compared to 16,096 reported the previous year. Average hardship debt for gas surged to $783 from $628.
Key Risks and Challenges
Increasing Electric Vehicles’ (EVs) adoption has cannibalized internal combustion engine vehicles, hence dampening demand for petroleum products. Considering high production manipulation, the potential risk of a declining trend in average retail petrol prices may prevail. With lower hardship debts in place, electricity consumers have signaled a drastic shift towards Distributable Energy Resources (DER) investments. From December 2019 to February 2021, 2P gas reserves have dropped by ~22% in the Gippsland Basin and by 5% in the Bass Basin, signaling reserves depletion. Energy Network Australia estimates an annual decline of $400 of household electricity bills due to high investments in DER.
Figure 4: Key Risks and Challenges
Source: Analysis by Kalkine Group
Outlook
The potential for the OPEC cartel to manipulate Crude Oil prices via production cuts and additional 20% discount in key markets are less likely to sustain and brings about expectations for oil prices to revert at stable levels. The Fuel Security Act 2021 gave immense relief to refineries, funded mainly by the Australian government, in infrastructure upgrades, full security services payment and minimum stockholding obligation. The use of fuel price apps among Australians has been successful with an increased user base under the fuel price transparency scheme. Australian Energy Market Operator (AEMO) anticipates Virtual Power Plant (VPP) capacity to reach 700MW by 2022 to address active forms of DER for consumers, for instance, EVs, battery storage or demand response. In line with higher expectations from oil-linked contract prices and LNG spot prices, the LNG export earnings for FY22 are revised upwards by $5.3 billion. Considering the developments in petroleum exploration and natural gas production, we have figured out four stocks on ASX that are set to see the momentum.
(1) Woodside Petroleum Ltd (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 20.34 billion, Annual Dividend Yield: 2.66%)
Recovery in Oil Markets Brings About Top-Line Support: Woodside Petroleum Ltd (ASX: WPL) is a leading natural gas producer focused on providing affordable energy solutions. In FY20, operating revenue declined by 26% and was registered at US$3.6 billion, owing to US$1,929 million impacts from unfavourable pricing impact and US$573 million impact from declined sales volume. Operating cash flow plunged to US$1,849 million, down by 44% YoY, primarily due to diluted top-line. The cash margin declined by one ppts and stood at 78%. In contrast, Operational cost performance stood resilient due to reduced maintenance costs and full-year production in Ngujima-Yin FPSO.
In H1FY21, WPL rested in positive territory with US$354 million in underlying NPAT relative to a loss of US$4,067 million. Operating revenue inclined by 31% and stood at US$2,504 million, owing to US$468 million of an onerous contract provision, US$387 million from price impact and US$176 million from increased sales volume. During the period, WPL generated US$1,318 million in operating cash flows and US$311 million in free cash flows. From a financial position standpoint, gearing declined to 23.3% relative to 24.4% in the prior period. Cost of debt remains below 3% levels with reaffirmed credit rating.
Outlook: If the merger deal with WPL and BHP is successful, it could create a build-up of long-life LNG assets and potentially powerful synergies. Further, the combined business can realise synergies of over USUS$400 million/year from optimising corporate processes and systems. For FY22, the company expects investment expenditure in the range of US$2,900 – 3,200 million.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs WPL (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of WPL went up by ~4.467%. The stock made a 52-weeks' low and high of $16.800 and $27.600, respectively. The stock underperformed the market volatility index. The company 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 might trade at a slight premium compared to its peer's average, considering a merger proposal with BPH and generating high free cash flows in H1FY21. For valuation purposes, peers like Senex Energy Ltd (ASX: SXY), Cooper Energy Ltd (ASX: COE), Karoon Energy Ltd (ASX: KAR) are considered. Considering the improved sales revenue, cash flow build-up, low gearing, and valuation, we give a 'Buy' rating on the stock at the current market price of $20.530, as of 20 September 2021, at 03:26 PM (GMT+10), Sydney, Eastern Australia.
(2) APA Group (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 10.61 billion, Annual Dividend Yield: 5.66%)
Resilient Top-Line Performance in FY21 Against Challenging Market Conditions: APA Group (ASX: APA) owns and operates energy infrastructure assets. Its range of business activities includes providing energy infrastructure, gas storage and processing. In FY21, revenue climbed by 0.7% and stood at $2,144.5 million, manifesting moderate revenue growth. Underlying EBITDA marginally declined to 1.3% and was registered at $1,633.0 million amidst softer contracting, increased investments in strategic development and higher compliance and insurance costs. Free cash flows declined by 5.7% and stood at $901.9 million amidst one-off SEA gas distribution and $39 million of shareholder loan interest in FY20.
Operational Update: APA is investing in the energy transition business. Gruyere Hybrid Energy Microgrid is a combined gas, renewable energy and storage solution, standing at a capex of ~$38 million. Mica Creek Solar Farm involves active engagement with the customer base and capacity development. Parmelia Hydrogen Project has confirmed phase 1 testing of the pipeline’s technical viability to transport hydrogen.
Outlook: FY22 distribution per security is expected to increase by 3.9% at 53.0 cps. Cash flows are expected to strengthen amid changing energy market dynamics and the increasing use of flexible supply arrangements. Organic growth capex is expected to exceed the $1.3 billion mark, spread over FY22 to FY24.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs APA (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of APA went down by ~10.933%. The stock made a 52-weeks' low and high of $8.800 and $11.150, respectively. The stock underperformed the market volatility index. The company 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 might trade at a slight premium compared to its peer's average, considering a diversified project investment portfolio. For valuation purposes, peers like AusNet Services Ltd (ASX: AST), Genex Power Ltd (ASX: GNX), New Energy Solar Ltd (ASX: NEW) are considered. Considering the high growth potential, a reversal from COVID-19 disruption, steady top-line, and valuation, we give a 'Buy' rating on the stock at the current market price of $8.880, down by ~1.334% as of 20 September 2021.
(3) Contact Energy Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 6.26 billion, Annual Dividend Yield: 3.89%)
Improving Fundamentals and Phasing-Out from Uncertainties: Contact Energy Limited (ASX: CEN) is an integrated and diversified energy firm focusing on generating electricity and gas in New Zealand. In FY21, EBITDAF inclined by 24% and stood at NZ$553 million, underpinned by NZ$132 million in total contracted revenue and NZ$47 million in trading, merchant revenue and losses, partially offset by NZ$77 million increase in generation costs. Profits inclined by 50% and stood at NZ$187 million due to La Nina weather patterns and gas deliverability.
During the period, free cash flows inclined by 28% and stood at NZ$371 million due to higher operating cash earnings and lower interest costs, partially offset by increased capex on stay-in-business. Growth capex inclined by 55% and stood at NZ$76 million, and strategic cash investment stood at NZ$40 million. Cash conversion inclined to 67% relative to 65% in the prior period. Net debt has declined by NZ$981 million since FY16 end. Gearing has decreased to 22.6% as of 30 June 2021.
Outlook: For FY21, CEN expects cash spent to range between NZ$310 – NZ$330 million due to additional capability and capacity added. SIB capex is expected to support higher asset availability. Geothermal volume generation is estimated at 3,250 GWh amidst minor geothermal safety program outages.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs CEN (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of CEN went up by ~0.127%. The stock made a 52-weeks' low and high of $5.710 and $10.560, respectively. The stock underperformed the market volatility index. The company 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 might trade at a slight premium compared to its peer's average, considering high cash conversion capacity and growth forecasts for geothermal generation. For valuation purposes, peers like AusNet Services Ltd (ASX: AST), Origin Energy Ltd. (ASX: ORG), Central Petroleum Ltd (ASX: CTP) are considered. Considering the improved cash conversion potential, decent debt levels, rising EBITDAF, and valuation, we give a 'Hold' rating on the stock at the current market price of $7.870, down by ~2.237% as of 20 September 2021.
(4) Karoon Energy Ltd (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 812.17 million, Annual Dividend Yield: 0.00%)
Tag Line: Karoon Energy Limited (ASX: KAR) is engaged in the exploration and production of oil with projects in Australia, Peru, and Brazil. In FY21, oil production from the Bauna field was registered at 3.14 million barrels (MMbbl). Oil revenue from the cargo lifted was reported at US$170.8 million. Unit production cost stood at US$25.11/bbl. Royalties are calculated at a rate of 10% of production, which stood at US$19 million in FY21. EBITDAX for the period stood at US$9.8 million relative to a loss of US$85.4 million reported in FY20.
KAR holds a resilient cash position of US$133 million as of 30 June 2021. Operating cash flow for the period stood at US$29.8 million, primarily attributed to oil sales receipts of US$137.0 million. The interventions are expected to be funded by cash and Burna project cash flow. In addition, KAR successfully secured a US$160 million debt facility for the Patola project to present a sound liquidity position. Further, the downside risk of oil prices is well protected by partial hedging.
Outlook: Production in FY22 is estimated in the range of 4.2 to 4.6 MMbbl, and unit cost of production is estimated to range between US$28 to US$32/bbl. The sanction of both the Patola field development and Bauna, a sound intervention program, holds the potential to increase KAR’s production by over 30,000 bopd in early 2023.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs KAR (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of KAR went up by ~20.175%. The stock made a 52-weeks' low and high of $0.700 and $1.490, respectively. The stock underperformed the market volatility index. The company 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 might trade at some premium compared to its peer's average, improved production estimates and prudent intervention program. For valuation purposes, peers like New Hope Corporation Ltd (ASX: NHC), Central Petroleum Ltd (ASX: CTP), Origin Energy Ltd (ASX: ORG) are considered. Considering the resilient industry, improved production potential, sound liquidity position, and valuation, we give a 'Hold' rating on the stock at the current market price of $1.370, down by ~6.485% as of 20 September 2021.
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.
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.