Energy Sector Earnings Preview

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            [5] => ((BPT))
            [6] => ((ROC))
            [7] => ((KAR))
            [8] => ((NXS))
            [9] => ((DTE))
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This story features SANTOS LIMITED, and other companies.
For more info SHARE ANALYSIS: STO
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

– Brokers review energy sector earnings expectations
– Cost control viewed as important
– Progess on major projects and exploration to be of interest
– Stocks in the sector offer value at current levels

By Chris Shaw

With reporting season in full swing for the Australian market brokers have updated expectations for stocks in the energy sector. While few stock-specific catalysts are expected with the results, of interest to the market will be updates on LNG projects.

In Macquarie's view any additional comfort in LNG developments is likely to highlight significant value across the sector. On Macquarie's numbers, the Australian energy sector is trading on a near-record discount to core asset value of 15% at present. This increases to a 29% discount to risked net asset value.

In terms of earnings growth, Deutsche Bank takes the view production growth will be the primary driver. As well, new projects such as Woodside's ((WPL)) Pluto-1 development will provide sources of incremental growth. Market attention will also focus on major project costs and timelines, as these are material with respect to company valuations. 

Given the current high cost environment and the fact a number of major projects in the Australian energy sector are at different stages of development, Deutsche sees cost control as an important factor when assessing upcoming results.

For Woodside, consensus in terms of net profit after tax stands at US$840 million according to JP Morgan, though the broker is below this with a forecast of US$778 million. This implies consensus estimates are too high, leading JP Morgan to suggest there may be some temporary share price weakness around the result on August 22.

Unknowns in the result are likely to include operating expenditure, depreciation and amortisation and tax expenses. Macquarie notes some in the market are looking for an increased dividend given the strong start to operations at Pluto, but this is considered unlikely before there is greater clarity with respect to capex requirements at Browse. Citi sees scope for a modest lift in dividend but expects management will look to maintain some flexibility.

Other features of the Woodside result in JP Morgan's view will be the gas strategy for Pluto-2 given the likely need to rely on third party gas for an expansion, along with further momentum at Browse where the expectation is Woodside will sell down more of its stake.

Leading into the result the FNArena database shows a Sentiment Indicator reading for Woodside of 0.6.

For Santos ((STO)), which is expected to report in August 17, the consensus interim net profit stands at $265 million. Bottom line growth is being restricted by rising interest costs and a higher expected tax rate according to Macquarie, while further updates on the GLNG project will be of interest given what was regarded as poor handling of recent related cost increases. 

Citi agrees, suggesting the market is likely to be interested in GLNG information such as reserve quality, ramp-up expectations and life cycle capex expectations. As well, JP Morgan expects some interest in Santos's Cooper Basin assets given the potential of tight gas and shale gas in the region.

Santos has a Sentiment Indicator reading of 0.9.

Consensus interim earnings for Oil Search ((OSH)) are forecast at US$107 million, with one significant point of interest likely to be updates on the timing of Hides development drilling given its importance for a third train at the PNG LNG project. At current levels Citi suggests investors are paying a discount for the initial two-train development and receiving a free option over a third train. 

As well, Deutsche Bank sees any commentary on the progress of the PNG LNG project in general as important, given the project represents 90% of net asset value for the company and around 30% of project capex will be spent this year. 

More information on production downtime at Kumul will also be important according to Macquarie, as this is costing the company around 15,0000 barrels of oil per day and is likely to see full year production trend to the lower end of current guidance.

The FNArena database Sentiment Indicator reading for Oil Search stands at 0.9.

Origin is due to report full year earnings on August 23 and consensus net profit stands at $880 million. Macquarie and Deutsche Bank both expect the market will focus on any update on the APLNG sell-down, as well as updated insights on the current competitive landscape with respect to customer losses or churn rates.

Origin's Sentiment Indicator reading in the FNArena database stands at 0.9.

Both Caltex ((CTX)) and AWE Limited ((AWE)) are due to report results on August 27, with Caltex delivering interim earnings and AWE its full year numbers. Given Caltex recently offered interim earnings guidance Deutsche suggests additional financial details related to the decision to close the Kurnell refinery will be well received, as will any update on momentum in the marketing operations. 

Citi agrees given its view the market is underestimating some costs post a shutdown at Kurnell. Downside risk to earnings is likely to stem from weaker refining margins, while upside risks include any cost reductions achieved above expectations.

For AWE the key will be the BassGas project, Citi suggesting points of interest will be any remaining risks for the installation of compression at the project and when capex estimates can be firmed up. As well, an update on the Perth Basin project will also be of interest given current fracture stimulation being undertaken.

Sentiment Indicator readings according to the FNArena database stand at minus 0.2 for Caltex and 0.7 for AWE.

Beach Energy ((BPT)) is expected to report net profit after tax of $113 million for FY12 on August 28 and given revenue for the period has already been announced Citi expects the focus will be on operating and exploration costs and tax expenses.

Further details on Cooper Basin royalties from Esso would be well received in Citi's view, while a reserve upgrade for the Cooper Basin is also anticipated. Leading into the result, the FNArena database shows a Sentiment Indicator reading for Beach of 0.2.

Interim earnings from Roc Oil ((ROC)) are due on Wednesday August 29 and JP Morgan expects a net profit of $22 million. Cost and capex data are likely to be key points of focus, especially in relation to the Beibu Gulf development. Roc's Sentiment Indicator reading in the database stands at 0.8.

Karoon Gas ((KAR)) continues the process of seeking a farm-in partner for five blocks in the Santos Basin in Brazil and given an outcome appears close Deutsche sees any update as of significant interest to the market. Browse Basin drilling results and plans for further exploration will also be of interest in Deutsche's view. Leading into the full year result the database shows a Sentiment Indicator reading for Karoon of 1.0. 

For Nexus Energy ((NXS)) an update on the Crux development will be a key part of the full year result in Deutsche's view, while further information on drilling at Longtom is also seen as of interest. The September quarter should also deliver an outcome with respect to a strategic review, so Deutsche expects an update on progress here with the profit result. The Sentiment Indicator reading for Nexus stands at minus 0.3.

Dart Energy ((DTE)) will also report full year earnings and Deutsche expects updates on the Airth and Liulin projects and the Fullerton Cove pilot well program. Dart's Sentiment Indicator reading according to the FNArena database stands at 1.0.

Dates for reports from Nexus, Karoon and Dart Energy have yet to be confirmed. 

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