Momentum in Petroleum Production Highlight Encouraging Prospects for Select Stocks: 3 Stocks to Watch Out

Key Takeaways from Australian Petroleum Statistics

Trending Momentum in Exploration Activities

Favourable Estimates for Crude Oil and Liquefied Natural Gas (LNG)

Key Risks and Challenges

Outlook

Considering the developments in the oil & gas and petroleum industry, 3 ASX stocks are identified to showcase the momentum.

(1) Santos Limited (Recommendation: ‘Buy’ at AUD 7.160, Potential Upside: Low Double-Digit)

(M-cap: AUD 23.45bn, Annual Dividend Yield: 2.78%)

Company Overview: Santos Limited (ASX: STO) supplies natural gas in Australia and Asia. The company has a portfolio of high-quality liquified natural gas (LNG), pipeline gas, and oil assets.

Recovery in Global Energy Demand Translated to Favourable Fundamentals: STO reported a record free cash flow of USD 1.504bn, up by 103% YoY. The company maintained disciplined capital management and operating model, with group unit costs down by 3% despite COVID-19 headwinds. Product sales revenue increased by 39% YoY to USD 4.71bn, and underlying profit expanded substantially by 230% to USD 946mn.

Business Update: Mayur Resources Limited (ASX: MRL) has executed an expression of interest with Santos Ventures Pty Ltd, a subsidiary of STO, to jointly develop a portfolio of nature-based carbon offset projects in Papua New Guinea.

Outlook: STO has witnessed an upstream production at 690TJ/d, and Roma Field production has gained momentum, approaching 200TJ/d. The company is focused on driving down operational costs by exploiting economies of scale.

(2) Worley Limited (Recommendation: ‘Buy’ at AUD 13.470, Potential Upside: Low Double-Digit)

(M-cap: AUD 6.89bn, Annual Dividend Yield: 3.79%)

Company Overview: Worley Limited (ASX: WOR) offers professional project and asset services in Australia’s energy, chemicals and resources sectors.

Positive Cash flow from Operations: In FY21, WOR reported an aggregated revenue of AUD 8,774mn vs AUD 11,249mn in FY20. With the positive cash flow from operations of AUD 533mn, the NPATA of AUD 161mn was recorded for FY21.

Growing Bottom-line in 1HFY22: Though the statutory revenue declined ~4% on a pcp basis but remained steady, the NPATA witnessed an uptick of ~90% in 1HFY22. The increment is due to cost savings program benefits and improved rates associated with professional services work.

Contract Wins: On 18^th July 2022, WOR received in-Kingdom and out-of-Kingdom project management services contracts from Aramco. And on 13^th July 2022, a contract for developing a proposed low-carbon power station was awarded by SSE Thermal.

Outlook: With the positivity expected on the revenue and earnings side, with the projected FY22 strategic operating expenditure spend of AUD 35mn, the company expects its EBITA margins to be sustained into 2HFY22 like 1HFY22.

(3) Ampol Limited (Recommendation: ‘Hold’ at AUD 32.360, Potential Upside: Low Double-Digit)

(M-cap: AUD 7.73bn, Annual Dividend Yield: 2.86%)

Company Overview: Ampol Limited (ASX: ALD) is an Australia-based company engaged in infrastructure & fuel, and convenience retail business.

Embarking upon a Record Sales Level: In FY21, RCOP EBIT climbed by 57% to AUD 631mn against the COVID-19 backdrop. The company claimed a record sales volume of 22.04bn amid solid international growth. The balance sheet remains encouraging, with leverage at 1.2x of RCOP EBITDA.

Favourable Quarterly Momentum: In Q1FY22, the Replacement Cost Operating Profit (RCOP) EBIT increased by 44% and RCOP EBITDA climbed by 25% PcP. The robust shop performance was underpinned by an improvement in gross margin of 2.5 ppts. Total sales volumes stood at 4,586mn litres, and Australian sales volumes surged by 2.1% to 3,251mn litres. B2B sales advanced 14% relative to the previous year’s period.

Business Update: On 27^th June 2022, the Overseas Investment Office approved Allegro Funds Pty Ltd’s acquisition of Gull business in New Zealand.

Outlook: As announced on 1st April 2022, ALD and EG have resolved the dispute about Fuel Supply Agreement. ALD has received all regulatory approvals on Z Energy. Since the end of Q1FY22, the product markets and global crude has continued to witness significant volatility, raising the market price of diesel and jet fuel.

Comparative Price Chart

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical issues prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing. 

Note 1: The reference date for all price data, currency, technical indicators, support, and resistance levels is 18th July, 2022. The reference data in this report has been partly sourced from REFINITIV. 

Note 2: Investment decisions should be made depending on an individual’s appetite for upside potential, risks, holding duration, and any previous holdings. An ‘Exit’ from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above. 

Technical Indicators Defined: - 

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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