Don't look now but the Aussie battler is fighting back!
By that I mean the Australian dollar, which is closing in on US80 cents with experts predicting further gains for our dollar. This will no doubt catch many analysts and investors off guard as most were forecasting the Aussie to head towards US70 cents instead.
I won't be surprised to see brokers scrambling to adjust their forecasts for the local currency just as the reporting season unfolds, and that will have a fairly profound impact on several of our favourite large cap stocks.
There's never a dull moment on the market is there?
As I wrote last week, there will be more losers than winners at the large end of the market from the resurgent Aussie battler, and one sector that could be thrown into chaos is energy with Credit Suisse warning of a "currency conundrum" facing the sector.
Let's put aside the fact that crude is in a bear market with the commodity desperately trying to claw its way back above US$50 a barrel. Let's also forget for the moment that most analysts have a downbeat outlook for oil as well.
The dramatic currency movement alone will raise questions about the economic viability of Australian-based projects undertaken by the biggest companies in the sector, as the revenue stream is in US dollars while the cost base is in Australian dollars.
For instance, Credit Suisse is currently forecasting oil to average US$65 a barrel and the Aussie to average US70 cents over the longer term. In Australian dollar terms, this puts the average oil price at around $92.86 a barrel. But if we factored in the current spot price for the Aussie, the average oil price will drop by around $10 a barrel!
Credit Suisse admits its average US dollar oil price forecast is probably more bullish than most other brokers. So if it just took the spot price for both crude oil and the Aussie, their valuation on the sector leaders drops very dramatically.
Are you sitting down? On Credit Suisse's estimates, Woodside Petroleum Limited's (ASX: WPL) fair value falls to $17.50 when the stock is currently trading at $29.94, Oil Search Limited (ASX: OSH) is worth $4.15 when it is trading at $6.72, Santos Ltd (ASX: STO) drops to $1.90 compared to its market price of $3.26 and Origin Energy Ltd (ASX: ORG) would only be worth $4.10 vs. its current price of $7.22.
These valuations are hypothetical as most experts (including Credit Suisse) do not believe the oil price or exchange rate will remain at these levels over the long term, but it does highlight the fact that value is difficult to find in the sector – particularly in the face of a mighty Aussie.
Ironically, companies that hold a large amount of US dollar debt will actually be better placed in such an environment, according to Credit Suisse. "Lucky" Santos comes out smiling here.
However, this doesn't mean investors should abandon the sector as there are very good value energy stocks for those who care to look. Credit Suisse points to Caltex Australia Limited (ASX: CTX) and Beach Energy Ltd (ASX: BPT) as the standouts.
