Out-of-Consensus Ideas for 3 Australian Stocks

Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

My followers are quite familiar with this fact that I enjoy discussing neglected stocks a lot. More often than not, I write on stocks that people have probably never heard of. Given that I find interest in discussing stocks with low popularity but high upside, I often end up discussing ADRs. Therefore, those who read me know that I have been covering Canadian and Chinese stocks for a while. This time around, I have shortlisted three Australian energy stocks that trade on the NASDAQ. It is important to note that these companies are due to report their earnings in another 10 days or so.

Woodside Petroleum (NASDAQOTH: WOPEY)

For Woodside, the Street is looking for guidance on growth. The consensus estimate for net profit after tax (NPAT) is $1,991 million. Though the NPAT is expected to come in line with the consensus, the EBIT might come ~5% below consensus given higher forecasted numbers for production and shipping costs versus the consensus estimates. Also, higher-than-expected depreciation & amortization expenses might dent the profits. Revenues for 2013 are expected to come ~15% below consensus for CY13 because of the downside in Pluto LNG prices and oil prices. In the upcoming earnings release on Feb. 20, investors will look for clarity on Woodside’s uncertain growth options. Without a major final investment decision (FID) expected soon, will the company look to return capital to shareholders?

Santos Limited (NASDAQOTH: STOSF)

For Santos, investors are looking for reassurance on GLNG. GLNG is a planned LNG plant in Queensland, Australia. It is a leading project in the conversion of coal seam gas. The expected NPAT of Australian $609 million is ~2% above consensus. However, this is not material given the leverage in the P&L. More importantly, it is expected that the company will again aim to appease investor concerns on GLNG, including resource quality, life cycle CapEx requirements, and project execution.

According to widely-held expectations, the company’s revised reserve position is likely to see minimal growth in GLNG 2P (experts know that 2P are those reserves that analysis of geologic and engineering data suggests are more likely than not to be recoverable under reasonable circumstances) reserves (given focus on production drilling) and a possible reduction in 2C resource (given a change in ASX resource/reserves regulation). However, the Street expects material growth in Cooper gas reserves. I remain comfortable with the GLNG resource given its expected long-term performance. The company will report its earnings on Feb. 22.

Oil Search Limited (NASDAQOTH:OISHY)

For Oil Search, the focus is on project execution & LNG expansion — Komo airfield is a critical path, but its completion in 1Q13 will still support 1st LNG plant by mid-CY14. The main question that investors will have up their minds in the earnings release is:

What is the timing of Train 3 FEED studies, and will FEED need to wait for Hides GWC well result in 3Q13?

Gulf of Papua drilling will start in first half of the second quarter this year. However, the Street is not optimistic about the program underpinning LNG expansion, noting the immaterial consideration paid by TOTAL on farm-in. Moreover, another important question to be asked will be:

What are the targets, sizes and probabilities of success for the program?

Talking holistically, Oil Search seems to be trading at attractive valuations. Though the Gulf of Papua or Taza exploration do not seem to spark up interest in the stock, however a major potential catalyst in the form of start of drilling of Hides Gas Water Contact Well in the second half of 2013. The company is expected to report on Feb. 26.

Foolish Bottom Line

I have a keen interest in discussing out-of-consensus ideas that are largely neglected by investors just because they are too busy following the Apples and Googles of the equity world. These three stocks are a perfect example of my taste.


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