AWE felled by the oil price
Recommendation
Santos and Origin are two of the biggest names in the local energy industry and both have been savaged by lower oil prices. Smaller producers have fared no better.
AWE is a case in point. Its share price has plunged 60% over the past 12 months even though it is largely a producer of gas. The catch is, however, that while gas generated 55% of output, it represents just 25% of revenue. Oil is deceptively vital for AWE and the price plunge has devastated asset values.
The Sugarloaf field, in the Eagle Ford Shale onshore USA, is now almost worthless and sucks in far more cash than it spits out. The Ande Ande Lamut oil field in Indonesia, a promising prospect that was to generate higher output and profit, is now in limbo following the problems of joint venture partner Santos. With the asset likely to be sold, its future is unclear.
Worst of all, however, is the poor operating performance of AWE's largest asset, the BassGas gas field which has persistently generated poor returns. As cash flows have dwindled, the company has turned to debt. The balance sheet isn't in danger but we expected the business to have plenty of idle cash at this point rather than net debt of $120m. Yes, the oil price plunge has been painful.
The share price now reflects the poor profitability we lamented in AWE: Interim result 2015 (Hold – $1.24) and there is a case to buy.
Gas output currently attracts low prices, but by 2017 gas contracts will be adjusted and prices could triple from current levels, repairing weak profitability. Yet that is still years away. At current oil prices, AWE will struggle to generate the cash needed to fund projects, and buying the stock is for iron-stomached optimists only.
This also highlights a problem is setting price guides for businesses exposed to commodity prices; we probably shouldn't, because they can only be relevant to a particular commodity price and therefore need constant adjustment. We're removing our price guide on AWE and sticking with HOLD.