The trouble with upside surprises

SANTOS delivered an upside surprise for the Australian oil industry last week with its better-than-expected profit result, which Slugcatcher reckons puts pressure on Woodside Petroleum to go one better this week with its own profit surprise and/or a deal to expand the Pluto LNG project.
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ENB's infamous Slugcatcher

Staff Reporter

Whichever rabbit Woodside pulls out of its corporate hat on Wednesday, with the release of its first-half results, what happened with Santos last week and the prospect of something special from Woodside this week, has reignited investor interest in the Australian oil patch.

Santos first, as it has runs on the board in the shape of an 11% increase in oil and gas production for the half-year to June 30, and a 20% increase in underlying after-tax profit. That was quickly translated into a 36c, or 3.2% share price rise.

From a corporate management perspective there is nothing to beat a philosophy of under-promising and over-delivering. That is precisely what Santos boss David Knox did with his profit announcement, and the almost casual way he announced the imminent start of commercial shale-gas production in the Cooper Basin.

The underlying profit of $283 million was 7% better than the $265 million analysts had been forecasting while the 27% rise in sales revenue to $1.49 billion flowed from the extra volumes and higher prices for oil and gas.

For analysts the Santos result was a double-edged sword though. They were pleased to have an upside surprise to write about, and embarrassed to admit that they got their pre-result profit tips wrong by a significant margin.

Humorous as that might sound, analysts live and die on their ability to make correct forecasts that clients can use to buy, or sell shares.

There are some clients of stockbroking firms feeling aggrieved because they acted on inaccurate Santos profit predictions and opted to sell ahead of Friday’s profit result. Those sellers missed the extra 36c at the stock’s closing share price or, more importantly, the extra 72c (6% bonus) on offer at Santos’ peak Friday price of $12.14.

The same early sellers might even like to take their complaints to Knox himself for saving the “commercial” shale-gas announcement for Friday, given the company had known about the stabilised flow rate of 2.6 million cubic feet of gas a day from the Moomba No 191 well for some time.

Santos, however, is last week’s news. While unquestionably good, the withholding of the Moomba shale gas flow and the failure to correct a 7% error in consensus analyst profit tips is an issue the company should consider. Sitting on good news can cause some investors as much pain as sitting on bad news. Achieving balance should be a line-item in the next Santos management meeting.

Woodside might be travelling the same road as Santos, and guilty of the same charge – sitting for too long on share-price altering good news.

The consensus profit tip for Woodside is around $US813 million after non-recurring items, broadly in line with the opening half last year. But, if the same 7% error made by analysts with the Santos tips is applied the profit could be $57 million higher at $870 million.

Other share-price altering events could be movement on the Pluto and/or Browse LNG projects, including the possible release of results from the Ananke No 1 well. That well could be the key to unlocking the stalled expansion of Pluto.

As a one-train LNG project Pluto barely makes sense. Two trains and it becomes the goldmine it ought to be.

So, what might Woodside chief executive Peter Coleman be sitting on that could deliver a significant upside surprise, the Ananke results or a deal on third-party gas purchases?

According to the top investment bank in the US, Goldman Sachs, the surprise could be a gas supply deal with the US oil company, Hess.

“Discussions with Hess are likely nearing completion,” Goldman told clients last week.

“We expect either a commercial agreement with Pluto or the North West Shelf, or an outright purchase of the [exploration] block by Woodside if it is LNG scale.”

Thought provoking as that Goldman suggestion is the reality of a deal could be some time off.

If Coleman casually rolls out the Ananke test results, or a gas supply deal for Pluto as his half-year party trick, then anyone who sold Woodside shares recently might be rather annoyed. Especially, that is, if the company’s share price rises sharply after the result is announced, and if it can be demonstrated that the company has known about the deal for some time.

An upside surprise is always welcome, but balance is better.

This article first appeared in ILN's sister publication EnergyNewsBulletin.net.

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