Stocks’ Details

Santos Limited

Signing of New Gas Supply Agreements: Santos Limited (ASX: STO) is engaged in the exploration and production of gold and petroleum. The market capitalisation of the company stood at ~$10.75 Bn as on 21^st July 2020. Recently, the company announced that it expects to recognise a non-cash impairment charge in the ambit of US$700-US$800 million before tax in 1H FY20 results to be released on 20 August 2020. The impairment charge is because of revised oil price assumptions resulting from the effects of the COVID-19 pandemic on energy market demand fundamentals. The company has reached a new gas supply agreement with Gold Fields Limited for its three gold mines in Western Australia. STO would supply around 5.5 petajoules of natural gas from its Varanus Island gas plant over three years, which started from 1^st July 2020. During Q1 FY20, sales revenues were lower against the prior quarter mainly due to lower average realised prices and lower domestic gas sales volume, partially offset by higher LNG sales volumes.

Sales Revenue (Source: Company Reports)

Production Guidance: The company seems to be well placed to leverage its growth opportunities whenever the business conditions will improve.  For FY20, the company expects production in the range of 81 mmboe-89mmboe. The company has scheduled to release its Q2 FY20 results on 23 July 2020.

Key Risks: The company’s business is exposed to the strategic risk created by the volatility in oil and gas prices as the company mainly generates its revenue from the production and sale of oil and gas products (including LNG) to a variety of buyers under a range of short-term and long-term contracts. Also, the demand for oil, gas, LNG and other products may be negatively affected by a range of external factors, including competition from alternative suppliers or other sources of energy supply, and changes in consumer behaviour or government policy.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: In the month of May 2020, the company wrapped up the acquisition of ConocoPhillips’ northern Australia and Timor-Leste assets for a reduced purchase price of US$1.265 billion plus an increased contingent payment of US$200 million. The acquisition delivered operatorship and control of a high-quality portfolio of low-cost, long-life natural gas assets and strategic LNG infrastructure. At the end of the March 2020 quarter, the company reported liquidity of over US$3 billion. We have valued the stock using the P/E multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Woodside Petroleum Ltd (ASX: WPL), Oil Search Ltd (ASX: OSH), etc., and arrived at a target price of high single-digit upside (in percentage terms). Thus, considering the acquisition of ConocoPhillips, decent liquidity, and new gas supply agreement with Gold Fields Limited, we give a “Hold” recommendation on the stock at the current market price of $5.340 per share, up by 3.488% on 21^st July 2020.

Oil Search Limited

Growth in Operated Oil Production: Oil Search Limited (ASX: OSH) is involved in the exploration, development and production of oil and gas resources with its assets in Papua New Guinea. The market capitalisation of the company stood at ~$6.25 Bn as on 21^st July 2020. During the quarter ended June 2020, the company reported a growth of 14% in operated oil production over Q1 FY20. The company continued to report strong PNG LNG performance, which operated at an annualised rate of 8.8 MTPA, against 8.7 MTPA in Q1 FY20. Also, the company successfully finished the two-well Alaskan exploration program. During the June quarter, OSH completed a capital raising of around US$700 million, which significantly strengthening the balance sheet, raising its total liquidity to US$1.67 billion.

Key Metrics (Source: Company Reports)

Expected Impairment Charges: The company anticipates to recognise a non-cash, pre-tax impairment charge in the range of US$360 – US$400 million in 1H FY20, which are scheduled to be released on 25 August 2020.

Key Risks: The company is exposed to material business risks such as Legislative and regulatory risk, political, community and other stakeholders, climate change risk and Joint venture risk. Also, the company’s business is heavily dependent on prevailing market prices for its products, primarily oil and gas. Any changes in the prices of these commodities may impact its revenue and cash flows.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The company stated that the maturity of US$300 million of short-term loan facilities has been extended to 30 June 2021. Net margin of the company stood at 19.7% in FY19 as compared to the industry median of 11.8%. This indicates that the company possesses decent capabilities to convert its topline into the bottom line against the broader industry. We have valued the stock using a P/CF multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For the purpose, we have taken peers such as Origin Energy Ltd (ASX: ORG), Worley Ltd (ASX: WOR), etc. Hence, considering the growth in operated oil production, recent capital raising and improved net margin, we give a” Buy” recommendation on the stock at the current market price of $3.140 per share, up by 4.319% on 21^st July 2020.

Buru Energy Limited

Completion of July 2020 Oil Lifting: Buru Energy Limited (ASX: BRU) is engaged in the exploration, development and production of petroleum. The market capitalisation of the company stood at ~$38.02 Mn as on 21^st July 2020. Recently, the company advised the market that the latest lifting of Ungani crude from CGL storage Tank 10 at Wyndham Port has been completed on 16 July 2020 for a total of 74,819 bbls. The next lifting is likely to be in early October allowing for continued production optimisation activity at the Ungani Field including time offline of the Ungani 7 well during a workover to install an ESP (electric submersible pump), as well as a planned recompletion of the Ungani Far West 1 well. As of 31^st March 2020, the company had a decent balance sheet with cash and cash equivalents of around $30.1 million.

Cash Flows (Source: Company Reports)

What to Expect: The company seems to be well-positioned for recovery and future growth. BRU is also strategically positioned with preparation of a prudent strategy for volatility under process.

Key Risks: The company is exposed to credit risk, which arises from the default of counterparties on their contractual obligations. BRU is sensitive to liquidity risk and to manage this risk; the company is required to maintain sufficient cash flows to meet its liabilities. In addition, the company is exposed to market risk such as currency rates, interest rates and equity prices, which arises from changes in market prices.

Stock Recommendation: Current ratio of the company stood at 3.61x in FY19 as compared to the industry median of 1.07x. This implies that the company is in a decent position to address its short-term obligations as compared to the peer group. Debt to equity multiple of the company stood at 0.06x in FY19 against the industry median of 0.48x. BRU has an EV to Sales multiple of 0.5x as compared to the industry median (Oil & Gas) of 10.0x on a trailing twelve months (TTM) basis. The stock of BRU is trading at a Price to Book Value multiple of 0.6x as compared to the industry median (Oil & Gas) of 1.1x on TTM basis. Thus, it can be said that the stock of BRU is undervalued at current trading levels. Therefore, in light of the decent liquidity position, deleveraged balance sheet and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.086 per share, down by 2.273% on 21^st July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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