Noting that the “recent defiant resurgence” of the Australian dollar had surprised most, the investment bank came up with a new foreign exchange valuation model, which happens to predict that Australia’s currency will be stronger over the medium term before settling at a long-term price of around US87c from 2018.
As part of a range of considerations, quantitative easing games by central banks overseas have become more relevant to the new valuation model.
“Unconventional monetary policy programs in the US, Japan, the UK and Europe have left Australia with the only triple A-rated currency with a nominal cash rate of 2.5%,” MPW said, adding that triple A-rated Canada was in second place with a rate of 1%.
“Indeed, there are only four other triple A-rated currencies in the top 10 most traded currencies.”
In terms of impacts to Australian oil and gas stocks, MPW expects those that report their 2014 earnings in Australian dollars may fall by an average of 11%.
“Revised forecasts are most detrimental to Santos, Senex Energy, Drillsearch Energy and AWE, where 2014 earnings fall by 9-12%,” MPW said.
“Meanwhile, US dollar reporters such as Woodside, ROC Oil and Horizon Oil see a more muted impact as higher US dollar operating costs are either diluted by international operations or offset by higher domestic gas production.
“While Oil Search also experiences muted currency impacts, earnings forecasts have been impinged by higher 90-day [London interbank offered rate] forecasts, which increase the interest expense associated with PNG LNG project financing.”
In terms of US dollar denominated LNG projects, MPW views that a higher Aussie dollar will add to development cost pressures and lower returns.
“Meanwhile, the Australia dollar denominated projects will now see lower revenue,” it said.
“Either way, the local LNG industry no longer looks to set to profit from the previously anticipated pullback in the Australian dollar just as these projects start up.
“However, with most of the greenfield projects approaching completion, this is perhaps more of an issue for future brownfield expansions opportunities.”
Despite the impacts, MPW is still rating Oil Search and Santos as its top picks among the large capitalisation stocks of the sector while its preferred mid-cap exposures are Horizon, Senex and AWE.
