An historic agreement occurred this week which will almost certainly have major ramifications for investors in oil stocks.
On Tuesday it was announced that oil sanctions would be reduced against Iran in exchange for Iran limiting its nuclear ambitions. According to reports the world is already producing around 2.5 million barrels of oil above demand which means any increase in oil output from Iran is likely to put further pressure on an already over-supplied market.
Just how much extra capacity Iran will add to global supplies is unknown, however, it is believed that the sanctions imposed on Iran have led it to produce at around about half of its full capacity.
Given that the ultimate profitability of an oil producer is dependent on the oil price and given the oil price is ultimately determined by supply and demand factors, the Iranian development should have investors in ASX-listed oil producers such as Woodside Petroleum Limited (ASX: WPL), Santos Ltd (ASX: STO) and Oil Search Limited (ASX: OSH) reassess their valuations.
The halving of the oil price in the past 12 months has no doubt caught many shareholders off guard and left them holding declining stocks – the share prices of Woodside, Santos and Oil Search have slumped 15%, 44% and 25% respectively over the last year.
Many shareholders who continued to hold oil producers as the oil price fell are no doubt now nursing capital losses and holding out in the hope that the oil price rises with share prices following suit. This stance could certainly be the right call with many analysts believing the oil price will settle above its current mid-US$50 per barrel range. There are certainly no guarantees that it will however and Iran's re-emergence is just one of the headwinds oil bulls must face.
According to consensus data supplied by Morningstar, analysts are forecasting a decline in earnings per share in both financial year (FY) 2015 and FY 2016 before bouncing back strongly in FY 2017. If Woodside does achieve the consensus figure in FY 2017 of 285.4 cents per share, it would imply the stock is trading on a forward price-to-earnings ratio of 12.2x. That would certainly be an attractive multiple if oil is still at cyclical lows however the key to determining the attractiveness of this pricing is to understand the consensus view on the average oil price level in 2017.
