The energy sector in Australia is of course dominated by the prospects for gas, as a Deutsche report suggests today. It has two associated risks: operational risk, including financing, and price risk. Of the two, the latter seems the more pressing, with gas prices falling in America and the prospect of America exporting LNG.
Deutsche says all the focus is on LNG:
Higher oil prices in 2011 will drive earnings growth for the Australian Energy Sector in the upcoming reporting season. However, with significant value linked to LNG projects not yet contributing to earnings, we believe news flow on these projects will be a key focus. Given inflationary pressures on wages and resource constraints, capex and development timelines will continue to be a critical focus. Despite a subdued macroeconomic outlook, the resilience of Brent oil prices so far in 2012 coupled with production growth underpin our forecasts for continued earnings growth into CY12.
Higher oil prices supportive of earnings
Brent oil prices averaged US$112/bbl in CY11, an increase of 39% on pcp. As a result, we see stronger oil pricing driving earnings growth for the large-cap energy stocks under our coverage, notwithstanding lower production in CY11. Because Origin Energy has limited exposure to liquids revenue, our forecast for FY12 interim earnings growth has been driven by the utilities business.
Capital expenditure is also a concern:
With operating revenues and exploration costs already in the market for E&P companies, we see key risks this reporting season in capex and major project timelines. A number of LNG projects are at various stages of development, as a result news flow on LNG project milestones will be critical in our view.
Deutsche has buys on Woodside, Santos, Oil Search, AWE and Dart Energy. It has holds on Origin, Caltex and Nexus. Santos and Oil Search are the top picks. Deutsche also has a buy on Paladin, with a 12 month price target of $1.95. The uranium company has refinancing issues but will start producing earnings next financial year, which should stabilise the share price.