From Morgan Stanley helped put a rocket under LNG today:
We increase our long-term oil price assumption to US$80/bbl (from US$60/bbl) from 2019, which is consistent with Morgan Stanley’s North American energy team. Previous work from the North American team has shown that higher oil prices arerequired to deliver production growth from US shale once oil markets become more balanced (see Global Insight: $80, not $60, Is the New $90). Weexpect the oil pricerecovery to bevolatileand it’s likely we will seelower oil prices from current levels near term.That said, oil markets areslowly rebalancing and, according to our commodity strategist, there is also risk that oil moves materially higher were there further supply disruptions (Bear to Bull rangefor 2016 is wideat US$35-80/bbl). We frame our recommendations in view of a volatile oil scenario. We also update our forecasts and price targets.
We upgrade Woodside to Overweight. Consensus is bearish given lack of growth and valuation looks undemanding (Woodside implies mid-US$50s/bbl oil vs other energy stocks in Australia in low US$60s). Yet there is protection to the downside should oil prices fall (given LNG floors) but still upside if oil prices rise. There is potential for M&A of discovered resources for sub A$1bn (outlined at recent investor day) and in an increasing oil price environment some of the growth options may become commercial (that are assumed by the market to be worthless).We also upgrade Santos and Origin to Equal-weight given the higher long-term oil price forecasts. Of the two, we prefer Santos for clients seeking greater leverage to an oil price recovery but it is higher risk given leverage and cost structure which takes us to Equal-weight given our view on volatility.
