Are These 3 Energy Stocks Worth a Buy or Hold at Current Levels– WPL, WOR, VEA

Stocks’ Details
 

Woodside Petroleum Ltd

Issue of Performance Shares: Woodside Petroleum Ltd (ASX: WPL) is engaged in the exploration, evaluation and development of hydrocarbon. As on 24 February 2020, the market capitalisation of the company stood at ~A$31.28 billion. The company has recently issued 313,668 Performance Rights shares under an employee incentive scheme. WPL also announced Peter John COLEMAN has acquired 106,895 ordinary fully paid shares at an estimated value of A$33.54 per share.

Strong Free Cashflow: The company has recently released its full-year results, wherein it reported a production of 89.6 MMboe and a full-year net profit after tax of US$343 million. During FY19, the company generated strong free cashflow of $2.1 billion, demonstrating the strength of its base business and the ability to fund growth. The decent financial performance enabled the Board to declare a fully franked final dividend of 55 US cents per share, bringing the total dividend to US$0.91 per share. 


FY19 Corporate Performance (Source: Company Reports)

Future Guidance and Expectations: The company has given production guidance for FY20 and expects to produce 97 –103 MMboe. It is also anticipating to maintain high cashflow and excellent margins with low spend in exploration. WPL also expects that the investment expenditure to be in the range of US$4,100 – 4,400 million in FY20. 

Valuation Methodology: Price to Cash Flow Based Valuation

Price to Cash Flow Multiple Based Approach (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months, 1USD=1.52 AUD

Stock Recommendation: As per ASX, the stock of WPL gave a return of 3.17% in the past six months and is trading close to its 52-weeks’ low level of A$30.580. This offers a decent opportunity for the investors to enter the market. During FY19, EBITDA margin of the company stood at 71.8%, higher than the industry median of 32.2%. In the same time span, current ratio of the company was 4.11x as compared to the industry median of 1.25x. Considering the returns, trading levels, higher EBITDA margin and modest outlook, we have valued the stock using Price to Cash Flow based valuation approach and have arrived at a target price offering an upside of lower double-digit (in percentage terms). For the said purposes, we have considered Oil Search Ltd (ASX: OSH), Santos Ltd (ASX: STO) etc. as peers. Hence, we recommend a “Buy” rating on the stock at the current market price of A$31.080, down by 6.386% on 24 February 2020.

Worley Limited

Significant Increase in Revenue and EBITA: Worley Limited (ASX: WOR) is a provider of professional services to help customers meet the changing energy, chemicals and resources needs. As on 24 February 2020, the market capitalisation of the company stood at ~$7.33 billion. The company has recently released its interim results for the period ending 31 December 2019, wherein it reported improved financial performance and realised benefits of ECR acquisition. During 1H20, aggregated revenue of the company witnessed a growth of over 134% and stood at $5,998 million and underlying EBITA was $366 million, up by 126% from pcp. The decent financial performance of the company enabled the Board to declare an unfranked interim dividend of 25 cents per share which is to be paid on 25 March 2020.


Revenue and EBITA growth (Source: Company Reports)

What to Expect: The continued strength of market conditions owing to growth in backlog provides expanded opportunities for growth. Post the ECR acquisition, the company has enhanced the diversity and added to its financial strength to support its Energy, Chemicals and Resources customers. WOR is expected to deliver benefits of the acquisition of ECR including the realisation of cost, margins and revenue synergies.

Valuation Methodology: Price to Earnings Based Valuation

Price to Earnings Multiple Based Valuation (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of WOR gave a return of 4.07% in the past three months. For the first half of FY20, gross margin of the company stood at 6.2% and net margin was 1.8%. Considering the returns, improvement in margins, significant increase in revenue and decent outlook, we have valued the stock using price to earnings based valuation approach and have arrived at a target price offering an upside of higher single-digit (in percentage terms). For the said purposes, we have considered Caltex Australia Ltd (ASX: CTX), Viva Energy Group Ltd (ASX: VEA) and Senex Energy Ltd (ASX: SXY) as peers. Hence, we recommend a “Hold” rating on the stock at the current market price of $13.850, down by 1.634% on 24 February 2020, owing to its recent release of interim results.

Viva Energy Group Limited

Strong Operational Performance: Viva Energy Group Limited (ASX: VEA) is engaged in manufacturing, distribution and supply of petroleum products to retail and commercial customers. As on 24 February 2020, the market capitalization of the company stood at ~$3.68 billion. The company has recently released its full-year results for the period ending 31 December 2019 wherein it reported strong operational performance and disciplined capital management. During FY19, underlying EBITDA and NPAT was within the guidance and stood at $644.5 million and $135.8 million, respectively. This was mainly driven by significant changes in competitive dynamics and higher oil prices. In the same time span, fuel sales volume witnessed an increase of 4.6% to 14.7 BL. The company declared a dividend of 2.6 cents per share on ordinary fully paid shares which is to be paid on 15 April 2020.


Total fuel volumes and Underlying Group EBITDA (Source: Company Reports)

Key Priorities: The company is focused on achieving its 2020 objectives and is prioritizing to optimize sales volume and margin mix. VEA will also focus on capital management and is targeting to complete efficient major maintenance turnaround at Geelong Refinery.

Valuation Methodology: EV/EBITDA Based Valuation
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EV/EBITDA Multiple Based Valuation (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM- Next Twelve Months

Stock Recommendation: As per ASX, the stock of VEA gave a return of 2.72% in the past one month and is inclined towards its 52-weeks low level of $1.640. During FY19, gross margin witnessed a slight improvement over the previous year and stood at 9%, up from 8.3% in FY18. In the same time span, ROE of the company was 4.1%. Considering the returns, trading levels, positive outlook and decent financial performance, we have valued the stock using EV/EBITDA valuation approach and have arrived at a target upside of higher single-digit (in percentage terms). For the said purposes, we have considered Santos Ltd (ASX: STO), Cooper Energy Ltd (ASX: COE) and Beach Energy Ltd (ASX: BPT) as peers. Hence, we recommend a “Hold” rating on the stock at the current market price of $1.910, up by 1.058% on 24 February 2020.


Comparative Price Chart (Source: Thomson Reuters)

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