Oil demand is tracking modestly ahead of expectations, while robust supply is failing to keep pace. We expect the oil market to enter a deficit supply balance during 2H 2024. The oil market may be pricing in some demand destruction, but if that does not materialise, we expect Brent oil to recover to >$80/bbl in the next 1-3 months. Forced ranking of our oil-exposed coverage at current share prices: #1 WDS, #2 KAR, #3 BPT, and #4 STO.
Woodside Energy (WDS)
The tide is certainly out in terms of investor sentiment on WDS. Despite Brent oil trading in line with our long-term forecast, WDS’ share price implies a near cycle-low oil price level. We do not see this as capable of being explained by WDS’ growth profile (comfortably funded) or risks around non-core assets such as Browse. While the share price performance has been disappointing, supported by a strong balance sheet and high margins, we see WDS investors as capable of being patient.
Investment view:
We maintain an ADD recommendation believing WDS offers attractive long-term value.
Karoon Energy (KAR)
Supported by a strong balance sheet (amassing cash), and a modest capex profile, KAR remains ideally positioned to re-rate off a recovery in oil market expectations. The issue has been the steady string of disappointing operational performances and guidance downgrades. However, combined with a new 5% dividend yield and active on-market share buybacks, we have conviction that KAR will start to turn things around and are attracted to its discounted price which we believe has significant value buffer in it.
Investment view:
Trading at a large discount to our target price, we maintain an ADD recommendation.
Beach Energy (BPT)
New management has had three attempts in 2024 of ‘clearing the decks’ and resetting a baseline for market expectations. But the numerous downgrades, combined with consistent optimistic messaging, has gradually eroded investor confidence in BPT’s ability to execute on its plans and its valuation re-rate as a result. Similar to the market’s apparent concerns, we also hold some reservations over short-term execution risks but do view BPT as trading at deep value levels.
Investment view:
We maintain an ADD rating but continue to caution that patience may be required.
Santos (STO)
Selling pressure has pushed STO’s share price modestly below our A$7.50 valuation, but this still appears within a reasonably close range to our base STO and pricing assumptions. While pleasing for shareholders, it is at odds with the discount that has appeared in STO’s ASX-listed peers and leaves us viewing its investment profile as relatively less appealing as a result. This is also demonstrated by the smaller distance to its high case scenario valuation versus larger/safer peer WDS.
Investment view:
With its investment phase progressing successfully, we maintain a HOLD rating, but a deeper selloff could present interesting value.
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