Oil price jump and east coast gas shortage fuels interest in energy stocks

Oil and gas might not appeal to environmentally-conscious investors, but what’s happened over the past week on the global and local stages makes it a hard sector to avoid if profits are what you’re after.
26th April 2019
Tim Treadgold

Oil and gas might not appeal to environmentally-conscious investors, but what’s happened over the past week on the global and local stages makes it a hard sector to avoid if profits are what you’re after.

A sharp rise in the oil price earlier this week to more than $US74 a barrel was largely a function of international events, including a fresh threat from Iran to blockade the narrow Strait of Homuz at the western end of the Persian Gulf in retaliation against US sanctions.

The latest price, which is also being aided by trouble in other hot spots and artificial production cuts by some major oil producers, means that oil is up 35% since the start of the year, outperforming most other commodities, with the possible exception of iron ore.

Local winners from the rising oil price include the usual suspects. Woodside added $1 to $36.56 over an Easter and Anzac Day-shortened week. Santos rose 45c to $7.44. Oil Search gained 20c to $8.20.

But below the leaders there was further evidence of a developing investment opportunity which has been hiding in plain sight for the past few years - the growing gas shortage along Australia’s east coast.

While consumers in Sydney and Melbourne are acutely aware of their rising energy bills, the flipside of the situation is the improving business case for a small group of gas-producing stocks which represent what might be called a gas-crisis portfolio.

Beach Energy, Cooper Energy, Comet Ridge, Galilee Energy and Senex Energy are all contenders for inclusion in a collection of stocks likely to benefit from the worsening east-coast gas shortage.

Analysts at Canaccord Genuity, a stockbroking firm, are particularly keen on Galilee, an emerging Queensland-focussed coal-seam gas producer which controls the Glenaras project near Longreach.

Over the past week, as the international oil price has moved up and the politicians talked about the east coast gas shortage (but did nothing), Galilee’s share price has risen by 10% to 41c – though Canaccord reckons it’s heading to $1.02.

Senex, which has added 2c to 37c during shortened Easter/Anzac trading days, could be heading to 53c, according to Canaccord. Comet Ridge, currently 30c, has a 55c price target, and Cooper could rise from 54c to 63c.

Only Beach, a tearaway success over the past two years, is tipped to fall, with its latest price of $2.23 dropping sharply to $1.82, simply because it has run too far, too fast.

Playing the east coast gas crisis is an investment thesis that could become particularly interesting after the May 18 federal election because encouraging oil and gas production is seen as politically incorrect by most parties, which means the gas shortage seems certain to worsen, pushing prices higher.

Other parts of the resources sector had a mixed few days, with the heat coming out of lithium and iron ore stocks worried investment bank analysts who see a price fall coming.

Among the lithium leaders, Galaxy was sold off sharply after a poor March quarter, dropping 25c to $1.57. Orocobre lost 35c to $3.63 and Pilbara eased back by 4c to 66c.

Gold stocks were battered by a gold-price slide caused by strengthening of the US dollar and a shift back to industrial investments as fears of a full-blown China v US trade war continued to ease.

Evolution slipped 20c to $3.21. St Barbara was 12c weaker at $3.12 and Northern Star shed a hefty 70c to $8.33 after a weaker-than-expected March quarter report which was offset somewhat by the forecast of a record June quarter.

Iron ore stocks were buffeted by a trio of tips from leading investment banks that the price of the steel-making material is due for a fall as Brazilian ore re-enters the market, with the latest being a forecast from Morgan Stanley that iron ore is heading for $US55 a tonne over the next few years, down 40% on its recent high in the mid-$US90/t range.

The toughening iron ore outlook rubbed 60c off Fortescue, which slipped to $7.59, and Mt Gibson lost 10c to $1.12 despite reporting that the first ship carrying ore from the redeveloped Koolan Island mine is about to sail.

Interest in copper as an investment theme for the next few years as demand grows in the electric vehicles sector was reconfirmed by an upbeat copper review from ANZ Bank’s commodity team, which expects the price to rise from its current $US2.90 a pound to $US3.12/lb over the next few months.

Other news and market-moving events in a short week included:

  • Bryah Resources adding 1.7c (25%) to 8.2c after announcing a farm-in deal on its manganese tenements in WA with OM Holdings.
  • Mincor rose 3c to 49c before easing back to 48c after announcing a substantial upgrade to the nickel resource in the Cassini project, which is now estimated to contain 28,500 tonnes of the steel-hardening metal.
  • Sandfire put on 29c to $7.41 as investors digested the strong March quarter production report, which encouraged Macquarie Bank to reinforce its buy tip on the stock and set a price target of $8.
  • Echo Resources started to develop traction at its re-developing Bronzewing goldmine and flagged an increased interest in merger and acquisition activity. The news  initially rubbed 1c off the stock, which settled at 15c and caused Canaccord Genuity to reduce its price target from 40c to 35c.
  • Havilah Resources said it has received a positive scoping study on its Maldorky and Grants iron ore projects in the north-east corner of South Australia, lifting the stock  1c to 16c.
  • Staveley Minerals reported fresh drilling success at its Thursday’s Gossan copper and gold project in Victoria with a best assay of 393 metres at 0.32% copper. On the market the stock eased back by 2c to 26c.
  • Red 5 reported more encouraging assays from its drilling at the King of the Hills project in WA, which is shaping as a significant bulk mining operation, with a best hit of 312m at 2.01g/t. On the market, the stock slipped 2c to 10c, and
  • Nickel Mines added 4c to 46c as it expanded its interest in the Morowali nickel processing venture in Indonesia. Bell Potter, which had been tipping a price target 72c as recently as April 15, got quite excited about the latest news and upped its price target to 95c.

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