It’s the major talking point today, negative oil prices. It’s absolutely nuts to think about. Today we look at how the Oil Search Ltd [ASX:OSH] share price is going, as well as its big ASX-listed oil stock peers.
You can see how the trio has performed in the last six months below (WPL share price red, OSH share price blue, Santos share price orange):
As the chart reads, all three were edging up towards the end of the year with a spike just after New Year’s. Why is the Oil Search share price down so much though? First a look at what’s happening with oil prices at the moment…
The latest oil price news, WTI goes negative
This from CNBC:
‘A futures contract for U.S. crude prices dropped more than 100% and turned negative for the first time in history on Monday, showing just how much demand has collapsed due to the coronavirus pandemic.
‘But traders cautioned that this collapse into negative territory was not reflective of the true reality in the beaten-up oil market. The price of the nearest oil futures contract, which expires Tuesday, detached from later month futures contracts, which continued to trade above $20 per barrel.
‘West Texas Intermediate [WTI] crude for May delivery fell more than 100% to settle at negative $37.63 per barrel, meaning producers would pay traders to take the oil off their hands.’
Fancy that? Paying someone to not have something…
Differing fortunes from differing product mixes
Shifting to ASX-listed energy companies.
As the biggest of the bunch, it may be tempting to think that the Woodside share price fall is not as bad as the others, simply due to its size.
But this is only part of the story.
A lot comes down to the different focuses that these companies have.
As you may know, Woodside’s main focus is its LNG operations.
Santos also has this dual operating model, with both oil and gas assets.
The Oil Search share price on the other hand, was hit harder as demand shockwaves from the coronavirus lockdowns took hold.
It’s been absolutely smashed, down over 68% in a 12-month period.
Looking at revenue breakdowns from the three companies, could tell us more.
WPL is almost entirely focussed on LNG, with US$894 million in sales for the March quarter 2020, of its US$1.08 billion total sales.
Oil Search is similarly weighted towards LNG (more than 80%), with its revenue breakdown revealing with US$293.5 million LNG sales in the same period from a total sales revenue of $359.4 million.
We are still waiting on their Q1 report but going by Santos’ Q4 report, they had only US$351 million in LNG sales, from a total of US$1.03 billion.
Why then the diverging fortunes? The Oil Search share price is doing worse than the Santos share price by a long margin, after all.
Oil Search’s finances and PNG predicament
This is a snapshot of Oil Search’s financial data as of their most recent quarterly:
Source: Oil Search Ltd.
As you can see Oil Search are making a big bet on their PNG LNG project.
Earlier this month, Oil Search went for a cap raise of $1.16 billion to shore things up.
This came in at $2.10 a share, a mighty fall indeed.
The LNG price has been crushed alongside the oil price since the outbreak.
Not to mention the various political factors that Oil Search is grappling with.
This from the AFR in February regarding PNG expansion negotiation hiccups:
‘JPMorgan analyst Mark Busuttil downgraded the share price outlook, rating the chances of Papua LNG proceeding without the PNG LNG expansion as low.
‘“While there is still the possibility of proceeding just with the two-train Papua expansion, we believe the likelihood is low,” he told clients.
‘“Therefore, the news has materially increased the risk that the entire expansion project is delayed indefinitely.”
‘Royal Bank of Canada analyst Ben Wilson downgraded the stock from neutral to negative on Monday.
‘“While it is tempting to rationalise this latest setback as another negotiating tactic, the protracted nature of concluding this last piece of the PNG T3-5 expansion puzzle will have even the most ardent Oil Search backers concerned,” wrote Mr Wilson.’
All this turmoil may have you thinking of making a bet on a potential takeover…
A quote from Simon Molyneux (via Energy Voice):
‘Oil Search’s share price has been smashed and they are becoming a takeover target. Their underlying business is strong and with great long-term prospects…Oil Search have a high-cost structure that would be an early target of any cost cutter.’
And the (really) long-term demand fundamentals remain strong for LNG:
Source: Bloomberg New Energy Finance
This versus the (really) long-term demand for oil:
What does all this tell us?
It shows us once again why no two companies are the same, that political factors are always important when making energy bets, and that having a strong balance sheet is more important than ever before.
Investment horizon is especially important too.
If nothing dramatically changes with LNG demand, Woodside should eventually reap the benefits.
Santos on the other hand could eventually need to make some tough decisions about its oil assets, should oil demand level off as expected.
Oil Search on the other hand, faces a clouded future but could be attractive to a big player with the right amount of cash.
I hope this shows why the Oil Search share price diverges significantly from the Santos share price and the Woodside share price.
Going forward, if you are thinking about an investment in ASX-listed energy companies, it is important to consider these companies on their individual merits.
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