If
-Upside price potential eroded by recent reduction in east coast gas prices
-Is momentum on cost reductions stalling?
-More explanation required regarding the extent of capital expenditure plans
While drilling success in the first half was above 80%, and the company has modelled a lower rate for its five-year outlook, brokers consider further success will be crucial to justifying the expanded expenditure.
A near term commercialisation path for
Credit Suisse expects a probable upgrade to the five-year production outlook and reserves in mid 2020, driven by Bauer output. That said, the broker remains cautious and wonders whether more expenditure will creep in after FY20.
At this stage, Credit Suisse has faith that management's plans are solid and believes the recent sell-off in the stock is a little overdone. Nevertheless,
While the company expects around 80% of gas contracts to be on updated pricing over the next three years, the broker notes upside potential has been eroded somewhat, given the recent reduction in east coast gas prices.
Oil & Gas Prices
Macquarie assesses the risk to oil and gas prices has intensified, noting, while the company has adjusted its Brent assumptions to
However, the broker points out
This creates risks, should commodity prices come under further pressure. The broker expects prices will be lower than what was assumed by the market 12 months ago, pointing out reserve increases from the Western Flank will not last forever.
Given lower gas production, capital expenditure increases and falling commodity prices Morgans expects free cash flow in the near term will be weaker. While
Morgans lowers assumptions for crude in FY20/21 but maintains long-term assumptions of
Capital Expenditure
In order to reach its five-year targets
The company had indicated back in
This concern is now exacerbated.
Citi, too, points out investors are interested in further understanding why expenditure guidance has been raised and the extent to which this and other disclosures will affect future free cash flow, pulling back some of its more aggressive assumptions.
Initial concerns over the expenditure have been somewhat allayed, Credit Suisse asserts, after the conference call, noting
Still, Citi has several questions regarding the capital expenditure program, such as how management can get costs under control without jeopardising operating integrity.
The original work program did not factor in the number of horizontal wells that are now planned, although the hiring of new staff was elevated to mitigate the risk of poor execution and the broker acknowledges some of these costs could be removed in future, depending on the scope of works.
On balance, Citi suspects there is upside risk to the outlook and expects free cash flow largely in line with the prevailing five-year outlook. On the other hand, Morgan Stanley finds it difficult to envisage a further re-rating on the stock unless exploration wells perform.
FNArena's database has four Hold ratings and two Sell. The consensus target is
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