Material Matters: Energy, Copper & Iron ore

Commodities | Jan 18 2021

Citi analysts view energy stocks as fairly priced at current levels; Macquarie remains positive on copper exposure while Ord Minnett thinks iron ore will remain strong heading into 2021

-Oil and LNG: New year, Higher prices
-Copper to continue to outperform in 2021
-Large-cap iron ore exposure preferred

By Angelique Thakur

Energy stocks: Potential for M&A activity going ahead

Citi’s commodity team believes energy stocks to be fairly priced at current levels even as the team has upgraded forecasts for its 2021 Brent Oil and LNG price decks.

Higher OPEC-Plus production cuts along with Saudi Arabia’s voluntary cut of -1mbpd may cause the oil price to hit US$59/bbl in 2021 with a peak of US$61/bbl in the first quarter of FY22, suggests Citi.

LNG is not far behind with Citi upgrading its 2021 JKM price forecast to US$9.6/mmBtu from the current US$4.9/mmBtu aided by an exceptionally cold first quarter (Asian winter) of 2021.

Irrespectively of these higher price forecasts, Citi analysts deem energy stocks to be priced fairly, with implied oil prices for pure E&P companies “tightly bunched in the mid-50s” range.

This is not to say there are no catalysts in the near-term. According to Citi, the energy sector is going to benefit from a number of factors working together, namely higher expected demand in a post-vaccine world coupled with low inventory and a lower US dollar.

Wait. There is more. These factors will likely induce higher flows into the sector which, asserts Citi, may become a hotbed of activity for mergers and acquisitions.

In the present environment, Citi prefers stocks strong enough to avoid raising equity at the time of making their final investment decision (FID) and consequently prefers Santos ((STO)) over Oil Search ((OSH)) although this does not stop the broker from downgrading Santos’s rating to Neutral from Buy over a lack of catalysts.

Another stock downgraded to Neutral over the lack of catalysts is Beach Energy ((BPT)). Woodside Petroleum’s ((WPL)) investment case isn’t so encouraging either, observes Citi, with uncertainties prevailing post a CEO change and the funding of its Pluto-2 project.

The sole E&P pure-play company left with a Buy rating from Citi is Senex Energy with its current share price considered too low for the now de-risked Western Surat and Project Atlas fields.

Copper: On an upward spiral

An outperformer in 2020 bolstered by government stimulus packages and green energy projects, copper is expected to continue its upward trajectory in 2021, asserts Macquarie, this time propelled by buoyant Chinese demand and more stimulus packages.

Copper had a volatile journey in 2020 with the difference between the base metal’s high and low price a staggering 72%.

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