Buy Hold Sell: Why fundies are bullish on energy (and 5 cracking stocks)

We're back, baby. And this time, we're trying something a little different. With multiple headwinds lashing markets at the moment, the team here at Buy Hold Sell thought it would be worthwhile taking a look at some of the sectors that are storming ahead (and those that are, let's face it, being battered). 

In this episode, it's all things energy. This sector has truly been able to withstand much of the volatility of tumultuous 2022, with some commodities (and related stocks) thundering to new highs thanks to unprecedented inflationary forces. 

So Livewire's Ally Selby was joined by two sector specialists - Tribeca Investment Partners' Todd Warren and Monash Investors' Simon Shields for their outlook on the fulgurous energy sector. 

Plus, they also analyse three energy plays, both old world and new, as well as each naming one of their top energy picks to take advantage of sky-high prices right now. 

Stay tuned for two more sector specials next week (spoiler alert: you'll be learning about the two biggest growth sectors of the past decade - can you guess what they are?). 

Note: This episode was filmed on Tuesday 27th September 2022. You can watch the video, listen to the podcast or read an edited transcript below. 

Edited Transcript 

Ally Selby: Hey, how are you doing? Welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and today we're taking a deep dive into the energy sector. It's one of the only sectors that has managed to keep afloat this year. And to do that, we're joined by Simon Shields from Monash Investors and Todd Warren from Tribeca. First up, it seems like the penny has finally dropped for equity markets, particularly after the Fed's latest hike. Simon, can you make sense of this market madness for us?

Making sense of recent market volatility 

Simon Shields: Well, central banks have had a lot of trouble making sense of the inflation numbers last year, which is why they've been so tardy in raising interest rates. They started doing it, then they got complacent, and then they've been frightened by the latest CPI numbers. The market's just going to have to get used to higher interest rates.

Ally Selby: What do you think this means going forward, Todd?

Todd Warren: In the space we operate in, which is resources, it's obviously been a good time. We called that inflation was going to be a big impact on the market a while back. Although as Simon says, it's taken a while for many other participants, mainly central banks to catch up. We think there's a great opportunity developing for resources that have been caught up in this malaise despite what we think is a long-term opportunity.

Lessons from investing in energy markets

Ally Selby: As you mentioned there, energy has really been one of the only beneficiaries of the market's multiple headwinds this year. What's one major lesson you've learned from investing in this sector this year?

Todd Warren: That the market can remain irrational longer than you can remain solvent? I think this is probably the best answer there. Despite what we see as the opportunity, as I say, the short-term fear trade has been very strong and there's been a lot of money to come off the table. Obviously, a lot of cheap money has been washing around in the market for a little while now. We're dealing with the consequence of that. We think that the longer-term consequence though, with regards to resources, is that there's been no money going in the ground for new supply. Obviously specific to energy, we think that's going to continue to be a thematic that plays out. But obviously, with energy, you've got geopolitics that can cause some short-term headlines that can be a risk factor for markets.

Ally Selby: Over to Simon. Is there a major lesson that stands out to you?

Simon Shields: I think the major lesson is the same old, same old. If you're going to see interest rates go up, markets are going to come back. And as much as we thought the share prices were correct as recently as six months ago, they weren't.

Why fundies are overweight energy (and whether it's a crowded trade)

Ally Selby: Okay. Simon, are you underweight or overweight energy right now?

Simon Shields: We're overweight energy right now, Ally.

Ally Selby: Okay, over to you, Todd? Overweight or underweight?

Todd Warren: Probably gathered from my answers so far, we're overweight.

Ally Selby: Okay. Everyone's incredibly bullish on energy right now. Obviously, you guys are as well. Todd, do you think this could possibly be a crowded trade?

Todd Warren: That's always a risk when you start to believe your own rhetoric as well. Judging by what we've seen on the market movements, it has been in terms of this sell down, there's certainly been some crowded nature to it. Certainly from the generalists coming and going from the sector. Being a specialist, you're always in there, so that can be a little bit blinding. Going forward though, I still am convinced that there's an underappreciation for the supply challenges that we face going forward in an environment where the market's become myopically focused on the demand destruction that might come from a recessionary environment.

Ally Selby: Simon, you're in the bull ring, but do you think there's a bear case on energy going forward?

Simon Shields: No, I don't think there's a convincing bear case on energy going forward. I mean, I'm a generalist, Todd, a little bit different because I don't have to worry about index weights. I just can be in it or completely out of it. And we want to be right in oil at the moment, for example, for the lack of capacity investment that's been happening over a very long period of time.

Santos (ASX: STO)

Ally Selby: Well, that's a great segue into some of our stocks today. First up, we have Santos. It's an oil and gas giant. Simon, starting on you. Is it a buy, hold or sell?

Simon Shields (BUY): Oh, it's definitely a buy. Santos acquired some great assets recently. Sold down part of that Oil Search acquisition, and now the gearing is looking relatively low, and it's got great exposure to the oil price.

Ally Selby: It's actually been sold off around 12% this week, but it's still up around 2% over the past year. Over to you, Todd. Is it a buy, hold or sell?

Todd Warren (BUY): Yeah, we're with Simon, definitely buy. We really like the narrative that's building around Santos. They've got some great assets, as Simon says. An area that I think is underappreciated is the cash generation that will come from this business in the long term because they are actually investing in building out their assets. But also, there's the carbon capture side that we don't think is appreciated at all, and that's something that could be a longer-term benefit for them as they prove the value of that carbon capturing storage angle to their story.

Core Lithium (ASX: CXO)

Ally Selby: Next up, we have a little bit of a sexier stock. It's Core Lithium. It's completely shot the lights out over the past year. It's up 207%. Todd, staying with you, is it a buy, hold or sell?

Todd Warren (HOLD): That's an easier question to answer about two weeks ago. It's retraced about 25% in that time. I'm going to go with hold. I'd rather not sit on the fence. I would've said sell two weeks ago. Given the retracement, it's a little bit more difficult. You are still pricing in quite a lot of value for non-reserves or resources in the ground. There's a lot going on for this asset. It's in the right thematic, being lithium. It's an asset in Australia close to infrastructure, so a lot of things I like about it, but there are probably better opportunities within the lithium space.

Ally Selby: Okay, over to you Simon. Core Lithium, is it a buy hold or sell?

Simon Shields (HOLD): No guts, no glory. I would've said hold a couple of weeks ago. I'm still saying hold. I mean, I don't really have a strong view about where the lithium price is going. The fact that Core can get a project up so quickly means that there's not going to be this huge delay in bringing on capacity with very high prices years down the track. It's going to be a wild ride in the space.

Coronado Global Resources (ASX: CRN)

Ally Selby: Okay. Next up, we have low-cost met coal producer Coronado Global Resources. Simon, staying with you, is it a buy, hold or sell?

Simon Shields (HOLD): Again, the coal price, I just can't get the same sort of handle on it as I can for the oil price, so I'm going with a hold.

Ally Selby: Okay, over to you Todd. Is it a buy, hold or sell?

Todd Warren (BUY): I'm going to go with buy. This is a company that has snatched defeat from the jaws of victory a few times in recent years. What we've got today though, is a very strong balance sheet, net cash, generating huge amounts of free cash. Obviously, with that comes the hope for dividends. They've started paying some dividends. They're exposed to both thermal coal and met coal, which gives them a little bit of a hedge against one market or the other. They're also hedged in terms of their geographic location, and I think actually where we might see some near-term upside, or at least into the next 12 months, is their met coal exposure out of the US, which is priced on long-term contracts. And that's their pricing still today, well below where the market is. There's still quite a decent upside from those met coal assets in the US.

Ally Selby: You mentioned dividends just then. It actually has a trailing dividend yield of 18.63%. Do you think that's sustainable?

Todd Warren (BUY): Well, I actually think it goes up.

Ally Selby: Oh my, okay.

Todd Warren (BUY): And that's a function of the huge free cash they're going to continue to generate. The market, obviously with a free cash yield of that high, is probably telling you they don't believe that it stays that level. But as I say, in the immediate term, I think it goes higher.

Karoon Energy (ASX: KAR)

Ally Selby: Okay. We asked our fundies to bring along their favourite stock within the energy sector today. I'm going to start with you Todd. What have you brought for us?

Todd Warren (BUY): I'm going with Karoon Energy, the Australian listed oil producer. It's had a very, shall we say, spotty history, but it's really changed its stripes. It's now a producer with its asset in Brazil that it purchased from the state oil company there, Petrobras. They've kicked so many goals since they've had that asset. 

They're generating so much cash that they haven't had to draw on a couple hundred million of debt that they've taken down. They're now just going through a program of working over a couple of the existing producing wells. That sees their production almost double and will continue to go higher. They've got two more development wells they will drill over the next 12 months, which could theoretically add another probably 10,000 barrels a day, taking them up to in excess of 30,000 barrels a day. 

As I say, clean balance sheet, they sell into the Brent market. It's got a management team which is very well respected. I guess the one thing which they're dinged for is potentially their one asset focus in Brazil. There's potentially the scope for diversification in terms of acquiring another asset. But we would actually see that as a positive because I think they've got the cash. They don't need any more equity. As I say, they haven't drawn on excessive levels of debt. And again, they're going to generate probably twice their market cap in the next couple of years in cash. We think it's great exposure to a growth story in a commodity you want to be exposed to.

Woodside Energy Group (ASX: WDS)

Ally Selby: Okay. Simon, can you beat that? What's your top energy pick?

Simon Shields (BUY): I agree on Karoon, highly leveraged to the oil price. A little bit more conservative, Woodside. Big oil company. Picked up some great assets again from BHP in this sell-down that the majors have been doing. Single digit PE. I think the market's got the medium to longer-term price of oil wrong. Great dividend yield. What could go wrong?

Ally Selby: Okay, well it seems our fundies are really bullish on oil at the moment. If you enjoyed that episode of Buy Hold Sell, remember to give it a like and subscribe to our YouTube channel. We're adding fresh content every week.

What's your top energy pick? 

Simon and Todd are both bullish on oil companies for the year ahead, choosing Woodside and Karoon as their top picks. But we would love to know what you think. Let us know your favourite energy stock in the comments section below. 

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