Material Matters: Energy Stocks, Coal & Oil

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A glance through the latest expert views and predictions about commodities. Energy stocks; metallurgical coal; and oil.

-Is the upgrade cycle for energy stocks over?
-Correction to seaborne coking coal prices likely
-Stronger US production a key oversupply risk in oil market
 

By Eva Brocklehurst

Energy Stocks

Ord Minnett makes changes to its price estimates for oil, increasing long-term Brent forecast to US$60/bbl. These changes largely result in reductions to near-term earnings estimates but higher valuations for ASX listed stocks.

Following recent price performance the broker now considers the sector fully valued. In most parts, consensus has caught up with Ord Minnett's forecasts, signalling the upgrade cycle is probably over. Within the sector Ord Minnett retains a preference for WorleyParsons ((WOR)) and Senex Energy ((SXY)) based on growth and value, upgrading the latter to Accumulate.

Origin Energy ((ORG)) is also preferred because of an ongoing de-leveraging process. Ord Minnett lowers its recommendation on Oil Search ((OSH)) to Hold based on valuation but remains positive about the outlook and strong growth prospects.

Citi also recently upgraded Senex Energy to Neutral/High Risk because of higher reserve forecasts for the Cooper. The broker now considers the stock to be fairly valued although there is upside for investors that take an optimistic view on long-term oil prices.

Citi notes reserve upgrades reported by Beach Energy ((BPT)) are not merely adding late-life production but there are many fields that are exhibiting a slower decline in production. For those investors buying the stock for momentum this development is supportive.

Citi increases its target by 32% to $1.62 but retains a Sell rating as the stock appears too expensive. The longer term outlook for growth is also less compelling than peers, in the broker's view.

If Santos ((STO)) were to upgrade reserves in line with Beach Energy, these would increase by around 14%. However, Citi calculates that the increase to valuation would only be small because it would represent plateau extensions rather than higher near-term production.

Metallurgical Coal

The seaborne price for metallurgical (coking) coal has corrected by -US$20/t in three days, to US$182/t. Signs that a correction was due, Morgan Stanley observes, include a correction in China's domestic coke price and accompanying fall in domestic metallurgical coal prices.

China has again tightened up import regulations surrounding metallurgical coal and some ports are now preventing ships from berthing, as annual quotas are filled. Meanwhile, traders are unable to import coal without a buyer. This is likely to reduce the call on seaborne supply. Moreover, a weakening yuan offers extra motivation for China's buyers to favour domestic coal.

China's domestic coal supply is also picking up, while environmental restrictions have potential to reduce crude steel output. On balance, Morgan Stanley suggests these drivers, as well as typical seasonality, signal further downside risk for metallurgical coal prices in coming weeks.

Oil

Commonwealth Bank analysts believe stronger US oil production is the key oversupply risk in the market. The US Energy Information Administration is forecasting US oil production will lift by 15.4% to 10.79mb/d this year and rise another 9.3% to 11.8mb/d next year.

The US may even draw on the strategic petroleum reserve to boost domestic output, which adds to fears of oversupply. Nevertheless, rising US oil supply is playing a secondary role in driving oil prices, the analysts contend.

Over-compliance with production cuts by OPEC had resulted in an agreement to boost output. There remains debate on how much OPEC and Russia will add but this over-compliance has reduced meaningfully in June to 19-29%, from 44-62% in May.

The analysts suspect OPEC and Russia may not be enough to offset collapsing OPEC output elsewhere. Venezuelans output is falling amidst an economic and debt crisis and US sanctions add further downside risk. US actions against Iran are also expected to sideline around 0.5-1% of global output.

The main concern regarding US oil supply is constraints on pipeline infrastructure. The Permian Basin is the largest shale oil basin in the US and infrastructure constraints may start weighing on supply growth from August and potentially last until the end of 2019.

Yet, the analysts suggest US oil supply may still grow at higher rates if other US shale basins expand. Bakken and Eagle Ford face fewer infrastructure issues but are typically more expensive when it comes to shale oil production.

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