Although prices of oil bottomed out in the mid US$20s per barrel in January, the effect on company share prices since their recovery to US$48/barrel today has been mixed.
Santos Ltd (ASX: STO) shares have risen 44% since early February. Senex Energy Ltd (ASX: SXY) is up 70%, while Origin Energy Ltd (ASX: ORG) is up 38%. By contrast, Woodside Petroleum Limited (ASX: WPL) is down 0.5% during the same period, and could be the best value of all of them.
Here's a comparison:
Woodside Petroleum (market cap A$22.6 billion)
- Trades around 7-8x last year's full year operating cash flows of US$2.3bn
- Average realised prices in 12 months to 31 December 2015 were ~10% higher than today's prices
- Average realised prices in most recent quarter were around US$40/barrel, 20% below today's prices
- US$4.4 billion in debt
Origin Energy (market cap A$9.7 billion)
- Trades around 10x estimated* current year full year operating cash flows
- Average realised prices in most recent quarter are down compared to last year
- A$9.3 billion in debt
*using ballpark calculations and doubling cash flow from operations for first six months
Santos Ltd (market cap A$7.4 billion)
- Trades around 7x last year's full year operating cash flows
- Average realised prices in 12 months to 31 December 2015 were ~10% higher than today's prices
- Average realised prices in most recent quarter were some 25% below today's prices
- Net debt of A$6.5 billion
Comparing oil/gas companies to one another can be complicated, because they're not always an 'apples to apples' proposition. Recent write-downs in asset values as well as the lag-time between sales and reporting (because annual reports cover last year's profits) can act to make the statutory and underlying profit figures irrelevant.
Investors willing to dig a little deeper might then look at overall cash flows, but I feel this can also be a little deceptive as it can mask the amount spent on acquisitions, capital expenditure, and repayment of debt. I prefer to start with the operating cash flow figure, as this shows exactly how much the company has to spend on 'stuff' like acquisitions, or debt repayments.
Before looking at how the cash is spent, it's also smart to have a look at the mis-match between current oil prices and the price the company has achieved over the past 3, 6, and 12 months, as this can be a (simplistic) indicator of whether cash flows are set to rise or fall.
Well, which should I buy?
Surprisingly, on these metrics both Santos and Woodside offer the best value, with each trading around 7x its operating cash flow for the past 12 months. Both Santos and Woodside can expect operating cash flows to fall somewhat as current oil prices are about 10% below last year's average received price.
However, once you factor in that Origin and Santos have very high debt and spend a significant chunk of cash on interest repayments – while Woodside spends it all on development and acquisitions – Woodside becomes the clear winner.
This is a simplistic measure and overlooks factors like the ramp-up of volumes at Santos and Origin's big LNG projects. It also does not include quality of the different companies' assets among other things, yet of the three businesses, Woodside still looks like the best value today.
