“We still expect another cycle in oil given the under-investment in the industry and demand recovery,” Bernstein’s chief oil and gas analyst in Asia Neil Beveridge said.
“You can believe in net zero and still be bullish on oil stocks and oil price in our view.”
Certainly share price gains in Australian producers since early November have been encouraging for investors. Oil Search is up by almost 66 per cent, closely followed by Beach Energy, while Santos is about 47 per cent higher and Woodside up about 41 per cent.
The ASX benchmark energy index has gained 37.1 per cent since then, almost the gain in the broader index. But it is still 28.4 per cent shy of where it was 12 months ago, while the broader index has dipped just 1.2 per cent. None of the producers have reached within 20 per cent of their levels of a year ago.
CEOs at producers in Australia are being careful not to be distracted by the price rally, which has included a record run for spot LNG to historic highs of over $US20 per million British thermal units, thanks to a freezing winter in north Asia, shipping congestion and plant outages.
“LNG and oil prices have had a strong start to the year and there is cautious optimism pricing will continue to be supported through the year,” Oil Search chief executive Keiran Wulff said, pointing to the restocking of LNG supplies in Asia that will be needed in the June quarter after winter, supporting prices through the shoulder season.
“Regardless of the improved pricing outlook, Oil Search will continue to run the business conservatively as we focus on costs, production and break-even to enhance resilience and position the company for greater upside in the event of longer-term stronger pricing than our current planning forecast.”
Santos’s Kevin Gallagher said he is focused on the same things he prioritised throughout the pandemic and when prices hit their lows last year – controlling costs and maintaining a “disciplined” operating model to remain resilient throughout the commodity price cycle.
“No-one should be surprised when gas prices go up or down – that’s the nature of our business,” he said.
“Certainly, we have seen a significant recovery in prices over the past months but energy companies get into trouble when they run their business based on prices at the top of the cycle.”
Beach chief executive Matt Kay is also wary of assuming the recovery will be sustained.
“All of us are hopeful that 2021 will be a year of greater stability, but if we learnt anything in the last 12 months, it’s to expect the unexpected,” Mr Kay told AFR Weekend.
He said that while LNG spot prices would likely ease off, the market dynamics timed with the recovery from the pandemic played in Beach’s favour as it starts marketing LNG from its Waitsia gas project in Western Australia, which got the go-ahead for development in December.
Mr Kay noted the positive reaction in the oil market to Saudi Arabia’s decision to curtail production and said he personally remains “bullish on oil price in the medium term” as demand returns on the back of stimulus programs and the roll-out of a vaccine.
In the eyes of industry veteran Eric Streitberg, executive chairman of junior Buru Energy, what is perhaps being missed by some is the ongoing demand for oil and gas despite the shift to lower carbon energy.
“Although there is an inexorable and necessary shift to renewables, the world still needs oil and gas in large quantities and will do so for decades to come,” he said.
“On the supply side, investment in the industry has collapsed and this can only mean production is unlikely to keep up with demand, which will inevitably lead to higher prices.”
Mr Streitberg said the decline in investment is also requiring more targeted exploration, with the only exploration wells to be drilled those that have a high chance of success and high upside, such as Buru’s upcoming wells in the onshore Canning Basin in WA’s far north-west.
