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Experts
Money Talks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.
Today we hear from VP Capital co-founder and portfolio manager John So.
Melbourne-based investment fund manager VP Capital has been keeping an eye on the oil and gas sector for the past 12 months.
So says the firm started watching the space when prices were at US$60 a barrel – now they have breached US$90 a barrel, which leads to substantial operating margins for companies in the sector.
“We have seen a corresponding re-rating of ASX-listed oil and gas stocks. One of the reasons this is happening is because there has been a chronic underinvestment in the space especially in relation to the replacement of oil reserves,” he said.
“This is caused by an underinvestment in drilling, partly because institutional investors have become a little more reluctant to fund such activities and also partly because the sector has been faced with domestic opposition in relation to cleaner energy.
“Nonetheless, in the foreseeable future it is too early to see oil and gas phased out of the equation.”
So said in the short- and medium-term VP Capital remains bullish on oil and gas while prices continue to go up due to geopolitical tensions in eastern Europe.
There’s also been a surge in M&A activity within the sector over the last 12 months as multinationals such as BHP move away from the sector by selling off their petroleum assets.
Another recent example is the merger between Santos and Oil Search, which is expected to create a “regional champion of size and scale, with a pro-forma market capitalisation of around $21 billion”.
It will also see a diversified portfolio of high-quality assets across Australia, Timor-Leste, Papua New Guinea and North America.
“This provides the opportunity for more pure play companies to increase their exposure and strategically position themselves as a long-life, low-cost asset for the next 10 years in a world where the big institutions haven’t spent as much money as they could have in replacing depleted reserves,” So said.
So says his first two large-cap picks are the two safest options set to take advantage of this trend.
In Woodside Energy’s case he said for the past few years the company has predominantly been an LNG play, which works in its favour while there is significant gas demand coming out of Japan and China.
“Woodside has also managed to shore up its balance sheet by selling down stakes in some of its big development assets in Western Australia and I think they have picked up BHP’s petroleum assets at a very interesting time,” he said.
“It complements their existing portfolio which is predominantly in Asia Pacific by opening up production angles in North America at a time when there’s a shortage of new oil supply coming onto the market.”
Once the merger has been completed (earmarked for the second quarter of 2022) it will create a global top 10 independent energy company by production and the largest energy company listed on the ASX.
With similar multiples to Woodside, So said STO probably has further M&A activity to undertake after its merger with Oil Search.
“There are rumours that it is looking to offload assets in Alaska currently held by Oil Search and may even look to sell down a stake in its PNG portfolio,” he said.
“It is an opportune time to shore up its balance sheet and position itself to be a long-term supplier of energy commodities to Asia in the coming 10 years.”
“WGO is a gas explorer with Strike Energy – they have a substantial gas field over in WA, and although the share price has declined around 50% in the last 12 months the resources they have are enough to support a very large gas field in WA,” he said.
“There is a continued huge demand for this in the East Coast and West Coast with trading houses willing to spend several hundreds of millions of dollars to develop these gas fields to satisfy demand.”
BPT trades at inexpensive multiples but So said the issue that has clouded its share price in the last 12 months has been due to a series of missed productions relative to market expectations and reserve downgrades in its Cooper Basin assets.
But Beach Energy is a diversified player and also owns assets outside of the Cooper Basin – it will no doubt benefit from an increase in profitability as high oil and gas prices continue to be sustained.
“There is also a potential M&A angle there as Seven Group – run by Kerry and Ryan Stokes – hold a substantial stake in it (30%),” he said.
“It wouldn’t be unexpected that at these prices, Seven Group will run a ruler over Beach Energy at some point.”
KAR is a one asset company and owner of the Bauna oil field in the Santos Basin, Brazil which operates on “low cost” and generates substantial cash flows, So said.
“Buying into Karoon Energy at its current market capitalisation ($1 billion) implies a payback of three years when the reserves are more than double that amount over a period of six years.
“This is a pure oil play that can take advantage of this current high oil price environment.”
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article
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