Despite a sharp rally overnight, rising to over $37 a barrel, the crude oil price has been walloped so far in 2015. Year to date it’s currently down over 30%, extending its losses from June 2014 to an ugly 65%.
It’s been a substantial and dramatic decline, and one many predict will continue in 2016.
The continued price slide has caught the attention of Nik Burns, equity analyst at UBS Australia.
In a research note this week, Burns assesses the impact on Woodside Petroleum, Oil Search and Santos – Australia’s largest producers – of a prolonged period of crude holding at $30 a barrel.
After conducting stress testing on all three, here’s his assessment on which company is best placed to ride out further prolonged declines.
Our analysis concludes that Woodside is the best placed of the three large cap oil stocks to ride out a period of lower oil prices. At US$30/bbl oil, we estimate WPL generates negative cash flow of US$195m in 2016, vs -US$445m for Oil Search and -A$859m for Santos. WPL has the ‘luxury’ of declining growth investment, but it remains on the hunt for acquisitions. Our cash flow calculation includes minimum debt repayments, which for OSH is relatively significant (~US$300m/annum). But with $1.6bn in liquidity, OSH has the capacity to ride out lower oil prices for at least two years, in our view. STO’s level of net debt should increase fairly rapidly at US$30/bbl oil, but with A$5.5bn in liquidity, we think STO has the balance sheet flexibility to ride out a sustained period of low oil prices. Key risk is around its investment grade credit rating rather than liquidity.
Overall, WPL needs US$28.40/bbl to generate positive FCF in 2016, on our forecasts, vs US$33.7/bbl for OSH and US$45.8/bbl for STO. Including debt and dividend payments increases the break-even oil price to US$36.80/bbl for WPL, US$51.40/bbl for OSH and US$54.90/bbl for STO.
While Burns conducted the stress testing based on a prolonged period of crude holding around $30 a barrel, he believes that “the seeds are being sown for the next oil-price boom”, citing recent cut to capital expenditure plans from global energy giants ConocoPhillips and Chevron.
“With little growth investment under way, we can see a scenario where oil markets rebalance in 3Q16,” says Burns.
“In the meantime, markets continue to focus on the near term, which, absent a sudden supply shock, seemingly lacks the catalysts to justify an oil-price rebound. But beware: Oil futures are not a reliable predictor of future oil prices!”
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