Oil prices have been smashed in global markets on declining demand due to COVID-19. While it’s not certain when the economy will recover, oil is essential in delivering the world’s energy needs and products.
The use of oil is widespread in modern life – oil refining is used in the production of plastics and chemicals, lubricants, waxes, tars and asphalt. Also, nearly all pesticides and many fertilisers are made from oil or oil by-products.
However, renewable energy generation is gaining pace and accounted for 24% of Australia’s total electricity generation in 2019, according to the Clean Energy Australia Report 2020. This represented a 2.7 percentage point increase on 2018.
Despite the improvement in renewables, fossil fuels still represents 76% of annual electricity generation. Fossil fuels like oil and gas representing such a high proportion of our energy mix is good news for the ASX oil shares Woodside Petroleum Limited (ASX: WPL), Santos Ltd (ASX: STO) and Beach Energy Ltd (ASX: BPT).
Here’s a closer look at how each of these 3 ASX oil shares have fared during the current crisis.
In April this year, Woodside announced its first quarter production had increased by 12% on the prior corresponding period, despite production being impacted by cyclone activity.
It also announced revised expenditure guidance for 2020 to around $1.7–$1.9 billion dollars, down from roughly $4.5 billion.
Woodside also announced that it is well placed to invest when market conditions stabilise and improve. This is backed by having cash on hand of $4.9 billion as at 29 February 2020, liquidity of $7.9 billion and low gearing of 13.8%.
At the company’s AGM on 30 April, CEO and Managing Director Peter Coleman stated: “I can assure you that Woodside entered this period of significant uncertainty with one of the stronger balance sheets in our industry and world-class, low-cost producing assets.”
In my opinion, the recent drop in Woodside’s share price could reflect a buying opportunity.
Santos delivered US$265 million of free cash flow in the first quarter and is targeting a break-even oil price of US$25 per barrel in 2020. In addition, Santos has over US$3 billion in liquidity and a gearing ratio of 29%.
Managing Director and CEO Kevin Gallagher said “Santos is well positioned to leverage the opportunities when prices and demand recover, which they will.”
Beach Energy delivered increased production of 8% in Q3 FY20, despite global uncertainty and oil price volatility. Managing Director and CEO Matt Kay stated this was down to the strength and resilience of Beach’s workforce and asset portfolio.
The company’s domestic gas portfolio helped offset the majority of the 30% decline in realised oil price, with total sales down 8% on the prior quarter at $431 million. The gas portfolio’s strength is helping it be resilient in the face of challenging market conditions.
Unfortunately, Beach’s decision to terminate its rig contract with Diamond Offshore Drilling has resulted in legal action, as announced to the market on 28 April 2020. The company denies the allegations that the contract was not validly terminated.
Beach Energy’s FY20 guidance is unchanged and remains at the lower end of its production, capital expenditure and earnings targets.
In my view, Woodside is in the strongest position to withstand the oil price slump. Furthermore, as the immediate economic future is uncertain, the importance of oil in our everyday lives in my view is indisputable, which is why I think ASX oil shares could present a long-term investment opportunity.
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Motley Fool contributor Matthew Donald 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.
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