The Macro Environment
Brent futures hit a near three-year high last week as global output disruptions have forced energy companies to pull large amounts of crude out of inventories.
Yesterday (17th September) Goldman Sachs raised its forecast for year-end Brent crude oil prices to $90 per barrel from $80, as a faster fuel demand recovery from Delta variant and Hurricane Ida’s hit to production led to tight global supplies. According to media data, the Hurricane Ida’s hit to supply has more than offset OPEC+’s production ramp-up since July with non-OPEC+ and non-shale production continuing to disappoint, Goldman said.
With oil price well above Pre-Covid-19 crash levels we can see most of the energy stocks well below pre-covid levels, specially Woodside and Oil Search, still providing a very good entry opportunity by comparison of the commodity price vs the stock price of these oil producers.
Natural Gas Price
The natural gas price rise is even more staggering. Gas prices rose, with prices on the spot market climbing by 400% since the start of the year, while electricity prices have jumped 250%, which also reinforces the value of the energy stocks at lower Share price.
(Asx: OSH) | Oil Search & (Asx: STO) | Santos
Oil Search operates all of PNG’s producing oil fields and holds a 29 per cent interest in the ExxonMobil-operated PNG LNG Project – a world class project exporting to major markets in Asia. Additionally, the company holds interests in the Elk-Antelope and P’nyang gas fields, which are expected to underpin the proposed construction of three additional LNG trains, with approximately 8 MTPA capacity. The firm’s joint venture partners are amongst the most successful and reputable oil and gas operators in the world. The combination of our in-country expertise, our partners’ technical and project management skills and PNG’s world class assets, leaves us well positioned to develop additional LNG capacity and grow PNG’s presence in the global LNG market. With a vast and highly prospective exploration portfolio in PNG, future activities will focus on the highest quality prospects that will create the most value for all stakeholders. In 2018, Oil Search undertook a transformational acquisition of oil leases on the Alaskan North Slope (USA) – a prolific, well-established oil province. As well as one of the largest conventional, onshore oil fields discovered in the US in the last few decades, the Alaskan portfolio contains many exciting exploration and appraisal opportunities with material resource upside.
The company is currently re-focuses on delivering the resources more than its exploration projects.
We have trade some oil stocks multiple times last year. After fulfilling BGS 20 Strategy on (Asx: OSH) few last year our last trade was just short profit locked in with OSH as the stocks struggled to move, with the whole energy sector having doing a disappointing performance during the first half of 2021. We now believe these 3 stocks are in the verge of an upside breakout due the higher prices natural gas and oil price despite the lack of performance over the last 6 months.
Oil Search is our favorite energy stocks due its large stock price swing ranges, however as its own it is the most risky energy stock compared to STO and WPL. The company operates in Papua New Guinea’s (PNG) oil fields and the PNG government holds 10% interest on the company which has been highly affected by Covid-19.
- 29% interest in the PNG LNG Project (operated by ExxonMobil).
- Operated oil and gas asset in PNG which contribute 20% of PNG lNG and produce all of PNG oil.
- 51% interest in Alaska oil assets which are the largest recent US onshore oil discovery.
- 22.8% interest in Papua LNG, a brownfield LNG growth opportunity.
Santos and Oil Search, two of Australia’s biggest energy producers, have finalised their agreement to merge into a $21 billion industry giant.
Oil Search has recently finalised the the Santos takeover deal. After conducting weeks of due diligence, the two ASX-listed companies confirmed the terms of the all-shares deal under which Oil Search investors would receive 0.6275 new Santos shares for each of their shares. For investment sake, it will make no much difference as the SP movement should be similar.
While the stock trades under OSH, we believe that could be a breakout indicated on the yellow square, fueled by the strong commodity prices.
Entry Details (restrict area for VIP Members only)
Santos is also a stock that we have previously traded and it currently trades 24% under pre-covid levels. By presenting better production/financial results than its peer Oil Search, Santos has outperformed in the sector, even beating the giant Oil and Gas producer Woodside Petroleum. The recent takeover on Oil Search shall put the merged company into the biggest players in the region.
- Santos and Oil Search have entered into a definitive agreement to merge the two companies in an all-scrip transaction
- Oil Search shareholders are to receive 0.6275 new Santos shares for each Oil Search share held
- Upon completion of the Merger, Oil Search shareholders will own approximately 38.5 per cent of the merged entity and Santos shareholders will own approximately 61.5 per cent
- The Merger creates a regional champion of size and scale, with a pro-forma market capitalisation of approximately A$21 billion
- Santos expects the Merger to unlock pre-tax synergies of US$90-115 million per annum (excluding integration and other one-off costs) which is expected to benefit both sets of shareholders
- The Oil Search Board has unanimously approved the transaction and recommends that shareholders vote in favour of the Merger in the absence of a Superior Proposal, and subject to an Independent Expert concluding that the Merger is in the best interests of Oil Search shareholders
- The Merger is subject to a limited number of customary conditions including Oil Search shareholder approval, regulatory approvals and Papua New Guinea court approval
The stock price is currently trading 24% under pre-covid levels, which as well as its peers, Santos stock price is trading significative undervalued by comparison to pre-covid levels which natural gas and oil were trading at significant lower value than the current levels.
Entry Details (restrict area for VIP Members only)
It is no secret this giant gas and oil producer has disappointed many investors due its slow SP movement. SP is currently trading 36% below Pre-Covid levels putting this as our second option to buy at the current levels just after Oil Search.
We have also traded Woodside using BGS 20 Strategy last year also, and we believe there is no better time to bet in this energy stock now that natural gas and oil prices are on the rise. Woodside is definitely more conservative trades than OSH and STO.
This is because SP normally completes shorter swings than OSH and STO. As indicated on the chart below, SP has just completed a bullish intersection level 2, followed by the confirmed bullish intersection level 1, the stock is now in buying area (according to our strategy). Buying a stock that presents good fundamental value and is taking an ascendant trend (under or around SMA levels) means paying a relatively fair price – or even cheaper if buying under SMA – therefore putting WPL as our second buying option within this sector, just after OSH.
The company has recently announced the acquisition of BHP Petroleum business, a world class asset and although to world is “going” carbon free, oil and gas still accounts for over 75% of world total energy consumption type.
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