Volatility offers opportunities

Market volatility creates opportunities


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Buying oil and gas stocks when the oil price is low can offer significant share price leverage once the oil price recovers.

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Boh Burima

Boh Burima

Market volatility shook investor confidence in October and November. At the time of writing the ASX is up 1.75 per cent today on the back of a positive meeting between US President Trump and Chinese President Xi Jinping. The two parties agreed to temporarily halt the imposition of new tariffs as they work towards negotiating a more permanent agreement. The share market looks set up for a Christmas rally. 

The price of Brent crude was below $US60 on Friday, falling from a 2018 high of $US86.29 per barrel at the start of October. OPEC will meet on December 7 and this could be the catalyst for some stabilisation in oil prices in the short term.  A good result for energy producers would be an agreement to cut production by about 1pc. 

Buying oil and gas stocks when the oil price is low (or when the market is pricing in a long term low oil price) can offer significant share price leverage once the oil price recovers. It is still important to look at fundamentals and risk when considering where to invest. 

One company which we believe offers long term value is Oil Search Limited (OSH). Oil Search is engaged in the development and production of oil and gas in Papau New Guinea.  OSH’s PNG LNG project is an integrated upstream natural gas and LNG development operated by ExxonMobil. OSH produces 30 million barrels of oil equivalent per year, of which about 80pc is LNG.   

China has previously included LNG as part of its proposed list of products upon which it will impose tariffs. China is Australia’s second-biggest LNG export market, accounting for 42 cargoes or about 3 million tonnes. China is also set to be the world’s biggest LNG importer by 2021. 

In 2014, the share price for OSH topped out at about $9.80/share, and in August  2018 OSH climbed to $9.20/share. Currently OSH is sitting at $7.64/share. Despite this share price decline, OSH still ranks as the 36th largest business listed on the Australian stock market.   

Part of our long held conviction in OSH is the multiple paths we think could carry the stock beyond our share price target. Namely: 

  1. Muruk growth displacing P’nyang as a lower cost option for expansion. 
  2. Further de-risking of the 3-train expansion. 
  3. Existing discoveries in the forelands and gulf region upscaling to underpin multiple additional trains (beyond the next three). 
  4. Trains 3-5 achieving similar outperformance as PNG LNG T1 & T2. 
  5. Further tightening of the LNG market (with gas a key baseload energy resource capable of supporting renewables). 

Morgans maintains our add recommendation for OSH. The key risk to our recommendation remains the oil price. 

  • Boh Burima Financial Adviser (Authorised Representative: 000341081) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410 
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