ASX energy stocks: Broker views and a fundie's top pick

Energy stocks are on a tear, the S&P/ASX 200 Energy index gaining more than 15% since the end of September and up 37% since the start of the year. There are various reasons for this, including energy supply disruptions spurred by the Russia-Ukraine war and the growing prospect of easing COVID restrictions in China.

But the high thermal coal and oil prices underpinning this are hitting other parts of the economy – particularly manufacturers and households – in turn prompting the Australian Federal Government to act.

ASX energy sector performance year-to-date

As the Albanese government considers a planned cap on natural gas, and potentially similar price controls on coal, resistance is building from the leadership of NSW, Queensland, and South Australia governments, as reported in the local business press. 

Gas producers hate the idea, which would cap prices at between $11 and $13 a gigajoule. Australia’s biggest oil and gas company Woodside Energy Group (ASX: WDS) has warned such a move could scupper its investment plans in Victoria’s Bass Strait gas fields.

The Federal Government will debate the pros and cons at a national cabinet meeting on Wednesday 7 December. In the meantime, we look at how some of Australia’s large cap energy stocks are faring. This includes a run-down of the major ratings for the likes of Woodside, Santos Limited (ASX: STO), New Hope Corporation (ASX: NHC), and Whitehaven Coal (ASX: WHC).

I also get some insights from Emanuel Datt, founder and director of Australian equities fund manager Datt Capital.

What the brokers think

Woodside Energy Group (ASX: WDS)

CLSA analyst Daniel Butcher on 2 December downgraded the company to Underperform, from Outperform. He also cut his target price to $37.53 from $38.44.

Jarden made a similar move on 30 November, cutting the Australian oil and gas major to Underperform from Neutral. The price target was reduced to $33 from $34. J.P. Morgan, and Barrenjoey have also reduced their ratings – to Underweight from Neutral, and to Neutral from Overweight, respectively.

But a positive rating remains in place at Citi, where analyst Paul McTaggart last shifted its view on Woodside in September when he upgraded the stock to a Buy from Neutral and increased the price target to $36.50 from $33.30.

Woodside shares were trading at $36.41 at the close on Monday, down around 7% since the start of November but up almost 70% - in share price terms, excluding dividends – since January.

Santos Limited (ASX: STO)

CLSA downgraded gas producer Santos to Outperform from Buy on 29 November, analyst Daniel Butcher cutting the firm’s price target to $8.11 from $8.81.

This followed an investor briefing on 8 November, which covered Santos’s restructure of its operations into Upstream Gas and Liquids, and Santos Energy Solutions earlier in the month. Management also the firm’s plans to build out its “transition business” including the decarbonisation and carbon management services businesses.

Earlier, on 15 September, Citi’s McTaggart left his rating at Buy but increased his price target to $9 from $8.30. This came after Santos management’s quarterly report cited higher long-term wholesale gas prices, an outlook for higher costs, and shrinking reserves.

Santos shares were trading at $7.34 at the market close on Monday 5 December, up 13.6% since January.

New Hope Corporation (ASX: NHC)

On 29 November, Citi upgraded the coal miner – which also has oil and agriculture businesses – to Neutral from Sell. McTaggart left his price target unchanged at $1.60.

The Brisbane-headquartered coal mining company on 3 November announced $300 million on-market share buyback, on an expectation of strong cash generation would continue on the back of high demand for thermal coal.

And on 24 November, New Hope cleared the final hurdle blocking the restart of the New Acland coal mine. After an almost 15-year approvals process, the Queensland government granted a water licence for the project, located in the state’s Darling Downs region. This was the final obstacle before it could expand the old pit and reopen the mine, which has been shuttered for 12 months.

New Hope shares closed at $5.65 on Monday 5 December, 143% higher than on 1 January 2022.

Whitehaven Coal (ASX: WHC)

The NSW-based coal miner was upgraded to a Buy from Hold by Stuart Howe of Bell Potter at the end of last month. Its target price was increased to $11 from $10.29.

A couple of weeks earlier, on 10 November, Citi also upgraded the stock – to Neutral from Sell. The company’s price target was decreased to $8 from $8.50.

UBS upgraded the stock to Buy from Neutral on 27 October, its price target left at $10 a share.

Earlier in the year, after Whitehaven’s FY2022 result in August, James Gerrish of Shaw and Partners-owned portal Market Matters described the company as “the best performing ASX 200 stock of the last year.”

The company, which reported a record $1.95 billion profit, turned a $1 billion debt into a net cash position of the same size in 12 months.

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The Whitehaven Coal share price closed at $9.55 on Monday 5 December, 246% higher since 1 January.

Energy stocks back on broker menus

Emanuel Datt is bullish on Australian energy companies. I recently spoke with him about his views on the sector – particularly those stocks mentioned above.

On the sector more broadly, Datt continues to favour the investment theses around what he regards as “cleaner” forms of baseload generation, above wind and solar sources.

He notes that many brokers are now more constructive on coal, gas, and oil companies than they had been a year or more earlier.

“Earlier in the year, they had market prices reverting to the long-term mean after six months but that’s now been kicked out to at least two or three years,” Datt says.

“It’s been close to a year now where we’ve seen elevated energy prices and there doesn’t appear to be any near-term prospect of lower prices, at least not for the next year.”

How price caps might affect ASX energy stocks

Datt regards Woodside as insulated from any price cap the government might enact, because most of its assets are either globally based or in Western Australia – which already has a gas reserve policy in place.

“I think Santos would probably be the one in the firing line, given its presence on the Australian east coast, if there is some sort of price policy enacted Federally,” Datt says.

Though he also notes some of the potential downside for ASX-listed energy companies is already priced in, at least partly.

“Shooting itself in the foot”

Unsurprisingly, Datt believes the introduction of pricing caps by the government are a bad idea. That’s because of the potential damage they would do to the local sector, which would potentially stifle foreign investment in the local production of energy resources and ultimately reduce supply.

Another of the potential measures – a super profits tax on mining companies – he argues would make the situation worse.

“The government would be shooting itself in the foot over the long term. We would fall way down the global ranks in terms of our attractiveness as for capital to invest – even if enacted on a temporary basis,” Datt says.

“I think really the only way out of this is for the government to encourage the commercialisation of suppliers that haven't come to market for whatever reason.”

Datt’s pick of ASX energy stocks

“It’s Whitehaven – and that’s because of that 25% buyback program the company is undertaking,” Datt says.

Whitehaven in late October received shareholder approval for a buyback of 25% of the shares issued in the year ahead. This builds on the more than $504 million buyback program of the past six months.

“And the company trades at about 2 to 2.5 times post-tax free cash flow currently, so it’s very cheap compared to its historical norms,” Datt says.

He believes that over time, the impact of buying back such a substantial portion of its register at these low prices – in addition to the restarting of fully franked dividends, now the company is again paying tax – will lead to excellent shareholder outcomes.

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