The seemingly unstoppable rise in global oil prices is powering our energy stocks with the sector claiming the crown for being the best performer on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index in September.
The Brent crude benchmark price has jumped 9% to US$84.83 a barrel on worries that supplies will fall short of demand as US sanctions against Iran starts to kick in November.
The current high in the spot price may not last as the forward prices for the commodity show a price retreat, but the sector will still enjoy a big consensus earnings upgrade regardless as analysts’ oil price assumptions used to calculate stock valuations are too conservative.
“Brent prices rose strongly during the week, and are now more than 20% above our base case CY18–19 forecasts and almost 30% above our long-run estimate. In both spot and forward curve scenarios, we see sizeable upgrades to forecasts,” said Ord Minnett.
“Running spot prices and currency rates to perpetuity results in an average upgrade to net profit across our equity coverage of 18% in CY18, 40% in CY19 and 49% in CY20. Our spot scenario increases our NPVs [net present values] by an average of 29%, given our long-run Brent crude estimate of US$60/bbl is 29% below spot.”
What this means is that the sector is a near-sure bet for a profit upgrade. While some miners are also likely to enjoy an upward revision on consensus forecasts, the Trump trade war with China has depressed some metal prices.
Oil enjoys a much rosier outlook, at least in the nearer-term, as there are signs that oil-producing countries may not be able to offset production losses from Iran and Venezuela.
The energy stock with the greatest upside if the spot oil price was used in its valuation is Oil Search Limited (ASX: OSH), according to Ord Minnett.
The stock’s NPV would jump by 43% to $12.60 a share from the broker’s base case if the current Brent price was used.
The stock with the second biggest upside to spot is Beach Energy Ltd (ASX: BPT) with its NPV rising 39% to $2.88 per share, while Santos Ltd (ASX: STO) is third with a 32% potential increase in NPV to $9.44 a share.
On the flipside, our largest energy stock Woodside Petroleum Limited (ASX: WPL) has the smallest NPV increase to spot. Ord Minnett estimates a modest 13% increase in its valuation to $39.52 a share.
This is followed by Origin Energy Ltd (ASX: ORG) with a 21% uplift to $11.24 per share.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.