The downbeat news flow for the future of the oil prices has continued. There is expected to be an oil glut into late 2017 according to the International Energy Agency (IEA). This would be bad news for oil and gas companies Woodside Petroleum Limited (ASX: WPL), BHP Billiton Limited (ASX: BHP) and Santos Ltd (ASX: STO).
In Woodside's case, its financial strength is likely to see it survive a prolonged downturn in oil and gas prices. However, in my view its share price could fall over the medium term.
Oil Price
The IEA's outlook has worsened since its April update. Back then it stated that the global glut in oil supplies could shrink significantly in the second half of 2016. However, this view was revised in mid-September when the IEA said an imbalance would remain until mid-way through 2017.
This is partly due to sluggish demand for oil, but mostly because of a failure to agree on supply restrictions. The current Opec meeting is unlikely to yield any kind of deal, since Iran and Saudi Arabia have stated that they view it as a consultative meeting. Further, Iran is intent on increasing production to reach pre-sanction levels, while Nigeria and Venezuela ramp up production to make up for lost production from earlier in the year.
LNG price
Alongside a bearish outlook for oil is an uncertain outlook for LNG. It also faces sluggish demand growth from key demand centres in Asia such as Japan and South Korea. Together they make up almost half of global demand for LNG.
In Japan's case, it was expected to increase demand for LNG following the decision to shut down all nuclear plants in the aftermath of the Fukushima nuclear disaster. However, it has restarted five nuclear power reactors and imports are down 6% so far in 2016. In South Korea's case, the start of new coal-fired power plants could lead to weaker future demand for LNG.
LNG prices also face uncertainty because of a forecast increase in supply. Between today and 2020, LNG supply is forecast to increase by 50%. This is mainly due to 130 million metric tons per annum of approved new LNG capacity which will see Australia become the biggest LNG producer in the world.
Outlook
Woodside has the financial firepower to withstand further challenges in oil and LNG pricing. Its balance sheet is strong, as evidenced by a debt to equity ratio of 29%. Its operating cash flow covered interest repayments 14.6 times in the first half of financial year 2016. Therefore, I believe that Woodside is a sustainable business which could take advantage of lower oil and LNG asset prices through further acquisitions.
However, its profitability could fall if LNG and oil prices decline. Therefore, I feel that now is not the right time to buy it and that these three blue-chips have far greater appeal.
