The RBC Capital Markets team has reviewed the Australian oil and gas sector and reiterated its positive outlook for the majors, while being less bullish on mid-tier company Beach Energy Ltd (ASX: BPT).
RBC has published a preview of fourth-quarter operating results for the sector and says shares in Santos Ltd (ASX: STO) and Woodside Energy Group Ltd (ASX: WDS) look like good buys at current levels.
Over at Santos, the RBC team says they expect a "relatively strong" fourth quarter coming off a weaker result in the third quarter.
As they said in their note to clients:
We forecast fourth quarter sales revenue growth of 6% quarter on quarter supported by higher WA production volumes (third quarter downtime), solid PNG LNG and GLNG production, and a return to normalised Cooper Basin production more than offsetting weaker commodity pricing.
They added that Santos' free cash flow generation has the potential to increase materially in 2026, assuming its Barossa and Pikka projects are delivered broadly as planned.
The RBC team stated that Santos aims to distribute at least 60% of its free cash flow to shareholders after 2026, which should support dividend payments.
Santos is currently sitting on a trailing dividend yield of 5.96%, franked to 10%.
RBC has a price target of $6.75 on Santos shares, compared with $6.14 currently.
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Pick of the bunch
But for even bigger gains, the RBC team is recommending investors take a look at Woodside shares, with an outperform rating on the shares and a price target of $31.50 compared with $23.31 currently.
In their research note, the RBC team said they like the company's long-term outlook, but were expecting a decline in sales revenue over the most recent quarter of 13% due to lower sales and production volumes.
Woodside has a trailing dividend yield of 7.15%, fully-franked, and if the RBC price target were achieved, that would represent a return of 35.1%.
Among the smaller oil and gas companies, Amplitude Energy Ltd (ASX: AEL) is the preferred RBC pick.
As they said:
We see improved Orbost operating performance, solid domestic gas price and higher priced spot gas sales supporting sales revenue growth of 4% quarter on quarter. Orbost has achieved record quarterly production.
RBC said new drilling in the Otway Basin starting this year also had the potential to add value.
RBC has a price target of $3.25 on Amplitude shares, compared to its current price of $2.90. The company does not currently pay dividends.
Risks to the downside
Meanwhile, the RBC team expect Beach Energy shares to fall to $1.05 compared with $1.14 currently.
They expect Beach's sales revenue to decline by 21% quarter over quarter and noted that production at Beach's Otway gas plant was 31% lower quarter over quarter.
Beach has a trailing dividend yield of 7.86%, fully franked.
