PREVIEW: Energy Sector Profits To Soar But 2009 Tougher

Australian oil and gas producers are expected to stand out from the crowd this reporting season, bucking the trend of falling profits thanks to record average oil prices in the second half of last year.

A few companies, like Santos Ltd. (STO.AU) and integrated energy company Origin Energy Ltd. (ORG.AU) will book healthy one-time gains after cashing in on the flurry of foreign investment activity in Australia's coal seam gas sector.

But, as Merrill Lynch said in a recent client note, 2008 will be "as good as it gets for the foreseeable future" for the likes of Santos, Origin, Woodside Petroleum Ltd. (WPL.AU), and Oil Search Ltd. (OSH.AU).

Investors only have to look at those company's ominous December quarter production and revenue reports to see just how much stratospheric energy prices drove last year's profit bonanza.

West Texas Intermediate crude peaked around US$147 a barrel in July and has since plummeted to under US$40 a barrel.

Most analysts expect oil prices to remain under pressure in the short term, reducing revenue and triggering asset writedowns and possible cutbacks in production, exploration and even dividends.

Many investors, however, will look past short-term margin pressures and focus on long-term growth plans, which, for most companies, revolve around liquifying domestic gas for export.

Nobody expects current sluggish demand and tight credit to kill those plans off - at least not yet - but timetable delays aren't out of the question.

The defensive nature of Origin and AGL Energy Ltd.'s (AGK.AU) downstream assets will provide some earnings insulation in 2009 as the local economy slows.

Woodside Petroleum:

Few surprises are expected with Woodside's 2008 numbers, due for release Wednesday.

Only a few weeks ago it provided guidance for full year 2008 net profit to jump as much as 75% to A$1.75 billion-A$1.8 billion.

The average 2008 net profit forecast of four analysts surveyed by Dow Jones Newswires is A$1.78 billion.

Woodside is expected to maintain its 2009 production guidance of 81 million-86 million barrels of oil equivalent, compared to 81.3 million BOE in 2008.

The profit result will include a combined A$430 million hit from foreign exchange losses, an impairment charge on some U.S. assets and a writedown on its canned U.S. OceanWay LNG import terminal.

Investors will be watching for progress reports on Woodside's big LNG export projects: Pluto, Pluto 2, Browse and Sunrise; and how these might be affected by the government's proposed emissions trading scheme.

Capital will also come into focus. Although Woodside raised US$800 million from banks in January, most analysts expect it will need to raise more in 2009, mostly for capex on Pluto. It hasn't ruled out an equity raising, or even a selldown of stakes in Pluto, Browse or Sunrise.

Santos

Full year profit, released Thursday, is expected to blow out to over A$1.5 billion thanks to the Adelaide-based group selling 40% of its proposed Gladstone LNG project to Malaysia's Petroliam Nasional Berhad.

Normalized earnings, taking out the Petronas proceeds, are expected to rise by about a third to A$534 million, according to five analysts.

Most analysts like Santos because it has exposure to one existing LNG project in Darwin, and two proposed projects, one in Papua New Guinea and one at Gladstone.

Like Woodside, news on plant progress will meet with acute investor scrutiny.

"We expect that Santos will cut back its exploration budget in an effort to preserve capital ahead of its LNG growth plans," JPMorgan said.

Oil Search

The Papua New Guinea-focused explorer and producer is pinning much of its growth on the Exxon-Mobil led PNG LNG project. Oil Search holds about a third of the project and could update the market on the results of current discussions with potential offtake partners when it reports Feb. 24.

Reported profit will get a boost from Oil Search's sale last year of its Middle Eastern and North African assets.

Adjusted 2008 full year net profit, minus those proceeds, is expected to jump to US$240.4 million from US$140.8 million in 2007 based on an average of five analyst's forecasts.

JPMorgan believes Oil Search could surprise with a dividend cut.

Despite analysts consistently picking PNG LNG as the most likely LNG project to succeed, it will be expensive to build and some cutbacks in Oil Search's production and exploration budgets are anticipated to expand funding capacity.

Origin Energy

Investors will be on the lookout for a downgrade to the integrated energy company's full year operating profit guidance to account for sharply lower oil prices, when it releases its report Feb. 26.

Origin's first half operating profit, excluding a US$5 billion upfront capital injection from LNG joint venture partner ConocoPhillips, is expected to rise 31% to A$261.4 million, according to five analysts.

But most analysts are tipping Origin to cuts its full year guidance of 30%-40% growth in operating earnings to somewhere closer to 20% growth.

Interest earned on the proceeds of the ConocoPhillips money will have a big impact on the company's bottom line.

First half profit is likely to be hurt by a poor performance from Origin's 50% interest in New Zealand's Contact Energy.

Investors will also be paying close attention to the effect the lifting of Victorian price caps will have on customer churn in the retail electricity business.

AGL Energy

The integrated energy company on Feb. 25 is expected to post a healthy rise in first half profit and stick to its annual earnings guidance.

Excluding gains and expenses on divestments and acquisitions, AGL is expected to book a first half operating profit of A$211.7 million, according to five analysts, up from A$182.8 million in the previous corresponding half.

JPMorgan reckons revenue will be driven by a higher contribution from the retail electricity business due to stronger margins, growth in electricity and gas customer numbers, and a stronger contribution from the electricity generations business.

AGL's full year guidance is for a net profit of A$370 million-A$400 million.

Caltex

Australia's largest oil refiner, 50% owned by Chevron Corp., last month announced a full year 2008 unaudited net operating profit, which smoothes out oil price volatility, of A$185 million, ahead of its final results announcement on Friday. This is down sharply from A$444 million in 2007 but higher than December guidance thanks to improved Australian dollar and refiner margins.

In December, Caltex downgraded its historic cost net profit guidance, which includes the value of its stockpiles, to between a loss of A$40 million and a profit of A$10 million.

Credit Suisse believes recent strength in Caltex's shares has been driven by unseasonably high Singapore refiner margins. "We still expect the refining business to be difficult in 2009," Credit Suisse said.

By Ross Kelly, Dow Jones Newswires; 61-2-8235-2957; [e-mail]