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Why one top broker still favours Santos, Oil Search and Woodside

As oil prices swing wildly, some of Australia's top oil stocks have faced significant selling pressure in the last month.

Being a contrarian is difficult business, and attempting to catch falling knives a dangerous enterprise.

Of course, that has never stopped investors, analysts and speculators before – and even though the coronavirus-led market panic we are currently witnessing has notched up some of the sharpest market declines in history – it’s unlikely to stop them this time around, either.

Indeed, oil prices continue to swing violently and wildly. Yesterday WTI Crude bottomed out at around US$23 per barrel – taking the Texas light sweet oil benchmark to a 17-year low. Today, futures violently swung the other way: according to Oil Price, WTI Crude is currently trading around 11% higher.

Like WTI, Brent Crude has rebounded modestly in the last day, and currently trades at US$28.27 per barrel.

This severe price action unfolds as a global oil price war between Russia and Saudi Arabia ruminates. Ultimately, what started as Russia rejecting OPEC’s suggestion to cut production as a means of stabilising oil prices in the face of falling demand; finished with Saudi Arabia vowing to flood the market with cheap oil.

That may have been what drove oil prices down, but the implications potentially run beyond mere price action. As a recent Bloomberg article suggests:

‘What started as a price war may turn out to be a much more important strategic rethinking of Saudi oil production policy, as the kingdom seeks to monetize its giant petroleum reserves as fast as possible rather than shepherding that store of wealth through the generations.’

Santos, Oil Search and Woodside share price forecasts

Even amongst this oil market upheaval, equity market carnage and geopolitical chaos – Macquarie Wealth Management, one of Australia’s most respected financial firms, continues to see upside in some of the ASX’s mainstay oil stocks.

Below we provide a brief breakdown of the recent performance of some of the ASX's key oil and gas stocks:

Company

Ticker

Share price

1-month performance

Woodside Petroleum

WPL

$16.27

-47.60%

Santos

STO

$2.89

-61.12%

Beach Energy

BPT

$1.010

-47.88%

Oil Search

OSH

$2.145

-61.57%

Mind you, the investment bank isn’t blind to consequence of an oil price war (nor the recent share price declines), with Macquarie positing a threefold impact on oil stocks: with lower oil prices set to hit earnings, create balance sheet risk and see risk to some of these firm’s key growth projects unfold.

Here, the investment bank said:

‘The decline in oil prices has driven earnings downside momentum for the large cap oil and gas producers. Balance sheets are now also stretched with growth projects viability in question.’

In spite of all this, Macquarie continues to favour the likes of Woodside Petroleum, Santos, Oil Search and Beach Energy.

Bullishly, the investment bank has Outperform ratings on each.

Price targets on these oil stocks remain elevated too, particularly when compared against current share prices. Specifically, the investment bank pegs Beach Energy’s fair value at $2.10 per share, Oil Search at $6.20 per share, Santos at $8.60 per share and Woodside Petroleum at $33.00 per share.

Talk about upside potential!

FInally and looking at the catalyst for the sector’s potential recovery? ‘Resolving the supply uncertainty,’ argues Macquarie.

‘We note that the majors are now largely trading below our spot price valuation estimates and there is further upside to spot valuations should we strip-out the capex heavy growth projects which would shore up the respective balance sheets,’ the investment bank also said.

How to trade ASX oil stocks

What do you think: is Macquarie way off the mark here or could we soon see a rebound in some of Australia's key oil stocks? Trade accordingly. Investors can use IG's world-class trading platform to go long or short on any of the oil stocks we have discussed today.

For example, to buy (long) or sell (short) Woodside Petroleum using CFDs, follow these simple steps:

  • Create an IG Trading Account or log in to your existing account
  • Enter ‘Woodside Petroleum’ or ‘WPL’ in the search bar and select it
  • Choose your position size
  • Click on ‘buy’ or ‘sell’ in the deal ticket
  • Confirm the trade

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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