Oil and gas stocks are staging a tentative recovery today after taking a beating from the falling crude oil price, but there’s one large cap in the sector that’s at risk of disappointing during this unfolding profit results season.
But the warning hasn’t dampened enthusiasm for the stock with the Santos share price jumping 2% to $6.78 in after lunch trade while the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index lagged with a modest 0.3% gain.
Santos share price is still outperforming
What’s interesting is that Santos is also outperforming its peers. The Woodside Petroleum Limited (ASX: WPL) share price is up 0.4% to $33.32, the Oil Search Limited (ASX: OSH) share price is up 1% to $7.03, while the Beach Energy Ltd (ASX: BPT) share price slipped 0.4% into the red at $1.89.
This is perhaps because Macquarie is still sticking to its “outperform” even though Santos is the only large cap energy stock that it thinks will post earnings below market expectations.
I also happen to think that an earnings miss may not be a big deal in the grand scheme of things as Santos is the most attractive ASX 200 energy stock in my view given the lack of growth options for Woodside, the sovereign risk facing Oil Search in PNG and stretched valuations of Beach Energy.
But coming back to Santos’ profit, Macquarie thinks the company is likely to undershoot consensus expectations by 5% due to increased depreciation and amortisation costs.
This is another reason why I am not too worried as the earnings miss isn’t due to operational issues.
“Despite a forecast 5% EPS miss, STO catalysts over the remainder of 2019 should see the company re-rate as several key projects de-risk,” said Macquarie.
These projects include the Dorado-3 flow testing in 3Q19, the Beetaloo Basin drilling in the same quarter and approval for Narrabri in early 2020.
The broker has a price target of $8.10 per share on Santos, which gives it a close to 20% capital upside.
Macquarie’s top mid-tier pick
If you are looking for opportunities in the sector that can deliver a bigger bang, you will need to look at the mid-tier producers, and Macquarie’s top pick in this space is Karoon Energy Ltd (ASX: KAR).
“We upgrade KAR to our preferred Mid cap under coverage on a valuation basis following the acquisition of Baúna,” said the broker.
“Once the deal is closed, KAR could be the 4th largest liquids producer on the ASX, with upside potential workovers and near-field tie-backs.”
Macquarie has an “outperform” recommendation on Karoon Energy and a price target of $3 a share.
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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.