With strength in mining and minerals, Australia’s energy consumption continues to rise. Fossil fuel dominates the energy mix with 62% from coal-fired plants. Australia is a net exporter of energy, with exports equating to over two-third of production. Gas consumption was the third-largest for electricity generation. The nation recently surpassed Qatar to become the world’s largest exporter of Liquefied Natural Gas (LNG). For 2019-20, LNG exports topped with $48 billion, shipping nearly 79 million tonnes, according to the Department of Industry, Science, Energy and Resources.
Figure 1. Fossil Fuel Dominates the Energy Consumption:
Data Source: Clean Energy Council, Chart Created by Kalkine Group
Being the world’s leader in metallurgical coal, Australia exported 177 million tonnes of metallurgical coal in 2019-20. Prices of Australian premium hard coking coal is expected to increase, supported by the rebound in industrialization, lifting demand for steel globally. Ban on imports by China to affect export earnings, but was partly offset by increased offtake by India, Bangladesh, Pakistan, and the Middle East. Coal mine operators in Australia has seen an expansion in capacity. Like, Illawarra Metallurgical Coal increased its coal output by 11%.
In the recent diktat, the federal government has decided to build a 1000-MW gas-fired power station in New South Wales by 2023 to replace the closing of the Liddell coal-fired station. This could trigger a wave in energy generation. As outlined in the below chart, natural gas took the third spot in the top ten exports for 2019-20. A cold weather in Northern Hemisphere helped to revive LNG trade globally, with demand reaching supply capacity.
Figure 2. Australia is One of the Largest Energy Exporter:
Data Source: Department of Foreign Affairs and Trade, Chart Created by Kalkine Group
The government has set up a National Gas Infrastructure Plan to implement critical infrastructure projects to address gas supply shortages before 2027 and to make gas a reliable source of energy. It identified opportunities for pipeline capacity expansion, additional storage capacity, and LNG import terminals. Listed below details of the key measures under the plan.
Figure 3. Critical Projects Under National Gas Infrastructure Plan:
Data Source: The Department of Industry, Science, Energy and Resources, Chart Created by Kalkine Group
In the 2021-22 budget, the Morrison government has unleashed an investment of $1.8 billion in the energy sector covering electricity, gas infrastructure, long-term fuel supply, and low emission technologies. It plans to establish four new clean hydrogen export hubs with an outlay of $275.5 million. The latest initiatives include an investment of $38.7 million in critical gas infrastructure projects to address gas supply shortfalls and a $6.2 million towards the development of Wallumbilla Gas Supply Hub. To further strengthen fuel security, the government plans to invest $50.7 million in fuel monitoring and compliance framework in Australia. It is also fostering low emission technologies with $1.2 billion covering co-funding arrangements with international partnership and carbon capture technologies. It is summarized below the budget proposal in the energy sector.
Figure 4. The $1.8 Billion Budget Proposal:
Data Source: Minister for Energy and Emission Reduction, Chart Created by Kalkine Group
Key Risks: Australia is one of the highest CO2 emitter. Being a leader in the exports of coal and LNG, the nation’s fossil fuel emission stood at 3.6% of global emission. Its carbon emission is nine times higher than China and four times than the US. The Black Summer bushfire and the Great Barrier Reef incidents were triggered due to increased fossil fuel consumption. Nevertheless, the nation remained committed to reduction of emission. In-line with global economies, Australia aims to cut emission by 75%, lower to 2005 levels by 2030 and to reach net-zero emission by 2035. Due to the acute shortage of gas supply, the wholesale prices of gas have peaked, which weakens the competitive position of Australia. Through investment credits and tax waivers, the regulators encouraged private investments in alternative, low-cost solar, wind, and energy storage technologies. Commitment to Paris Agreement is expected to pose a threat to fossil fuel consumption.
Figure 5: Key Risks Affecting Fossil Fuel Consumption:
Source: Analysis by Kalkine Group
Outlook: The metallurgical coal export is expected to accelerate as prices of premium coking coal is likely to sustain and is lifted by new supply arrangements outside China. Export volumes is expected to reach 191 million tonnes and export earnings to increase to $31 billion by 2026, according to The Department of Industry, Science, Energy and Resources. The infill drilling in the Bayu-Undan field to extend production at Darwin LNG facility. A 5mtpa expansion at Pluto LNG is expected to uplift LNG capacity in Australia. LNG exports earnings are expected to increase to $45 billion in 2025-26. The global recovery and conducive monetary policy environment are to support industrialization, which will see an increase in demand for core commodities such as steel, iron ore, silver, etc. This may accelerate demand for LNG and coal to address the spike in global energy requirements. Considering the developments in energy and fossil fuel, we have figured out 4 stocks on ASX that are set to see the momentum.
(1) Woodside Petroleum Ltd. (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 21.75 Billion, Annual Dividend Yield: 2.28%)
Offshore Projects and Hydrogen Plans Intact: Woodside Petroleum Ltd. (ASX: WPL) is a petroleum exploration company, providing crude oil, natural gas, and other petroleum products. WPL posted a 12% increase in petroleum production, reaching 100.3 million barrels of oil equivalent in FY20 despite setbacks from Tropical Cyclone Damien in February. It’s gas JV, Scarborough, is progressing as per plan with the targeted investment decisions to hit in H2 FY21 and is expected to achieve a production capacity of 8 million tonnes of LNG per annum. Its Sangomar offshore oil project is targeted for production in 2023. Due to lower oil and gas prices, WPL posted a 26% dip in operating revenues to US $3.60 billion in FY20 over the prior year. In an effort to cut carbon emission, WPL shortlisted a hydrogen project in Tasmania. It also invests in retailing hydrogen in South Korea. EBITDA margin declined from 71.8% in FY19 to 41.2% in FY20, which reflects weak realization. Its third-party gas processing facility at NSW has entered second stage. Its oil drilling project projects provides considerable costs savings during the fiscal. Its bottom-line turned negative in FY20 owing to impairment and provisioning of contract totalled ~US $4.37 billion. Excluding this, profitability improved to US $447 million in FY20 (vs. US $343 million in FY19). The company’s gearing ratio increased to 24.4% owing to the Cairn acquisition. It has liquidity of $6.70 billion, providing adequate coverage for the next 12-18 months. The debt profile looks satisfactory, with a majority of debt maturing in 2029.
In the quarterly update, WPL posted a 4% increase in revenue, reaching US $1.12 billion in Q1 FY21. Drilling at Sangamar project is scheduled for mid-2021. It had signed an MOU with the Tasmania Government for the proposed renewable hydrogen project.
Outlook: WPL is expecting petroleum production to reach 90-95 MMboe in FY21 (vs. 100.3 MMboe in FY20). Investment expenditure is planned at US $2.9-3.2 billion towards Sangomar Phase 1 and Scarborough.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs WPL (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted 3-month and 6-month returns of ~-10.78% and ~+8.06%, respectively. It is currently trading slightly above the average of the 52-week high price of $27.60 and the 52-week low price of $16.80. The stock underperformed the market volatility index on the back of weak natural gas prices. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a slight premium as compared to its peer average EV/Sales (NTM Trading multiple) considering the ramp-up in the Scarborough project targeted for 8 Mtpa offshore capacity. The company’s NSW project to provide an uplift in domestic gas volume to Western Australia. The company remains committed in reducing carbon emission with investments in various hydrogen projects. For this purpose, we have taken peers such as Peninsula Energy Ltd. (ASX: PEN), Senex Energy Ltd. (ASX: SXY), Boss Energy Ltd. (ASX: BOE), to name a few. Considering the decent performance in Q1 FY21, commitment in carbon emission with hydrogen projects, adequate liquidity with undrawn credit lines, we give a “Buy” recommendation on the stock at the current market price of $22.520, down by 0.266% on 17th May 2021.
(2) Cooper Energy Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 432.22 Million, Annual Dividend Yield: 0%)
Lower Crude Prices Impacted Margins: Cooper Energy Limited (ASX: COE) operates oil and gas exploration projects in the Cooper Basin of South Australia. The company owns six tenements located throughout the Basin. The company witnessed an increase in production from 1.31 MMboe in FY19 to 1.56 MMboe in FY20. Due to the pandemic, COE pushed its commissioning of Orbost Gas Processing Plant. Realization improved with gas price improved by 14% YoY to $8.99/GJ in FY20, while crude oil prices dropped by 18% to $83.75/bbl over the prior year. Overall revenues increased by 3% over pcp. Its offshore gas project completed during the year. The acquisition of Minerva Gas Plant to boost ongoing development in the Otway gas project. The company had 16 wells drilled in Cooper Basin and two wells in Otway during the year. EBITDA margin dropped to 30.8% in FY20 and posted a net loss of $86.03 million owing to impairment totalling $108 million.
In the H1 FY21 update, COE commenced the sale of its Sole Gas project, with production increased by 82%, reaching 1.20 MMboe in H1 FY21 over the prior year. Its Orbost Gas processing plant underwent maintenance with the reconfiguration of absorbers. The company secured long-term gas contracts for its Sole Gas project. It is working to increase gas production rates. The company has partnered for Coorong Biodiversity Project to remain committed to cut emission. It had purchased carbon credit units through partnership. Its EBITDA margin of 7.8% was due to weak realization with the gas price dropped by 24%. Capex dropped to $17.0 (down by 73% YoY) on the back of the completion of the Sole Gas project. Net debt increased to $114.1 million as of December 2020, with deleveraging to kick in Q3 FY21. COE closed the cash balance at $115.3 million.
Outlook: COE projected production to be in the range of 2.7-2.9 MMboe and sales volume in the range of 2.9-3.1MMboe in FY21. In the recent quarter performance, COE witnessed a 46% increase in revenue in Q3 FY21. Capital expenditure is expected to be $45-50 million.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs COE (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted 3-month and 6-month negative returns of ~14.75% and ~27.78%, respectively. It is currently trading above the average of the 52-week high price of $0.460 and 52-week low price of $0.235. The stock underperformed the market volatility index. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at some discount as compared to its peer median EV/Sales (NTM Trading multiple) as the company is exposed to volatile commodity prices. Lower natural gas prices continue to impact its realization in Q3 FY21, affecting profitability. For this purpose, we have taken peers such as Santos Ltd. (ASX: STO), Beach Energy Ltd. (ASX: BPT), Origin Energy Ltd. (ASX: ORG), to name a few. Considering the upliftment by Sole Gas project in H1 FY21 production, ongoing development in the Otway gas project, growth projections, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.260, down by 1.887% on 17th May 2021.
(3) Viva Energy Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 3.19 Billion, Annual Dividend Yield: 0%)
A Drop in Transportation Demand Impacted Profitability: Viva Energy Group Limited (ASX: VEA) is engaged in the manufacturing of petroleum products. It markets fuels, lubricants, chemicals, and bitumen. VEA experienced reduced demand for transport fuel with petrol and jet impacting the most during the pandemic. Total sales volume dipped from 14.7 BL in FY19 to 12.3 BL in FY20. Refining margins and productions rates declined, impacting the realization at US $3.1/ BBL in FY20 (vs. US $6.6/ BBL in FY19). It had added 40 retail service stations during H2 FY20 taking the total branded network to 1,300 services stations in FY20. It had roped partnership for the Gas Terminal project and fist investment decision to be taken by mid of 2022 and targeting first gas delivery by 2024. It had announced a partnership with HYZON for hydrogen development. Its retailing segment posted an increase of 18.9% in underlying EBITDA, while the commercial segment dragged by 19.6%. Overall, underlying EBITDA de-grew by 19.4% over pcp. Lower revaluation gains, the decline in profits by associate companies, and weak refining margins impacted profitability with a net loss at $36.0 million in FY20 (vs. a profit of $113.0 million in pcp). It had about US $700 million debt facilities available. The company returned $114.9 million to shareholders through special dividends and buyback totalling $50.0 million.
In the Q3 FY21 operational update, VEA posted 17% drop in sales volume, while refining margins improved by 119% to US $5.9/ BBL.
Outlook: VEA is expected capex in the range of $185-$210 million in FY21. Distributable NPAT to be positive and the company to remain committed to return $100 million. Refining margin is dependent on the Fuel Security Package announced by the federal government.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs VEA (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted positive 3-month and 6-month returns of ~23.56% and ~15.90%, respectively. It is currently trading above the average of the 52-week high price of $2.291 and the 52-week low price of $1.440. The stock outperformed the market volatility index driven by easing of restrictions which had lifted the mobility requirements. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at some premium as compared to its peer average EV/EBITDA (NTM Trading multiple), given its commitment to carbon emission with hydrogen projects, focus on premium positioning with “Fuel the Feeling" campaign in Q3 FY21 to increase Shell-branded network. For this purpose, we have taken peers such as Senex Energy Ltd. (ASX: SXY), Adx Energy Ltd. (ASX: ADX), Worley Ltd. (ASX: WOR), to name a few. Considering network expansion strategies, dividends and buybacks to shareholders, government budget, which is expected to lift the performance, trading levels, valuations, we give a “Hold” recommendation on the stock at the current market price of $2.130, up by 7.035% on 17th May 2021.
(4) Cleanaway Waste Management Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 5.78 Billion, Annual Dividend Yield: 1.55%)
Industrial and Liquid Waste to Support Margin Expansion: Cleanaway Waste Management Limited (ASX: CWY) is a waste management company providing recycling, bathroom hygiene, liquid and hazardous waste, and wastewater management services. Declining commodity prices impacted commodity revenues which stood at $74.5 million in FY20, a 3.5% of total revenues against 4.5% in pcp. Integration of Toxfree business resulted in synergies of over $35 million in FY20. The company is progressing towards the 2025 strategy for carbon reduction with the EfW project in Western Sydney. Solid waste and liquid waste revenues dropped in H2 FY20 owing to the pandemic. On the contrary, the overall EBITDA margin improved to 21.1% in FY20 owing to cost sweeping measures.
In H1 FY21, net revenues showed a flat change to reach ~$1.07 billion, as an increase in the solid waste segment was offset by decline in revenues of industrial and liquid waste. The company achieved the first full first-half results of the Victorian Commingled Resource Recovery business. It had completed the acquisition of Grasshopper Environmental in NSW and Stawell landfill in Western Victoria during the period. It’s Statewide Recycling in regional Victoria contributed first full first-half results. EBITDA margin expanded slightly to 21.8% in H1 FY21 vs 21.6% in pcp, aided by relief payment, improved pricing of hydrocarbons, and acquisitions. It had closed the period with a cash balance of $31.8 million as of December 2020. Perth MRF rebuilds resulted in an increase in capex to $120.9 million. CWY has headroom to borrow ~$433 million of debt as of December 2020. The average maturity stood at 5.5 years. Net debt to underlying EBITDA ratio, although increased to 1.57x but appears satisfactory.
Outlook: CWY is expecting FY21 full-year underlying EBITDA to be moderately higher than FY20. It continues to progress in plastic pelletising and energy from waste project developments.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs CWY (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted positive 3-month and 6-month returns of ~19.07% and ~18.07%, respectively. It is currently trading above the average of the 52-week high price of $2.865 and the 52-week low price of $1.820. The stock performed well over the market volatility index. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at some discount as compared to its peer average EV/EBITDA (NTM Trading multiple) as the company is exposed to commodity and metal prices. Realizations were impacted by low metal prices and headwinds in the commodity market. For this purpose, we have taken peers such as Bingo Industries Ltd. (ASX: BIN), Access Innovation Holdings Ltd. (ASX: AMI), Cardno Ltd. (ASX: CDD), to name a few. Considering the positive results from the acquired entities, growth strategies, improvement in EBITDA margin in H1 FY21, current trading levels, valuation, we give a “Hold” recommendation on the stock at the current market price of $2.800, down by 0.356% on 17th May 2021.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
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