Morgan Stanley's reporting season preview for 6 ASX energy stocks

This article was first published for Market Index.

Morgan Stanley says geopolitical tensions and underinvestment provide a favourable risk skew to oil and gas prices in the short-to-medium term. However, the bull case for energy is not as clear cut as it was a year ago.

Oil prices are trading roughly flat year-to-date but natural gas prices have plummeted almost -40%. Domestically, the Australian Government also imposed short-term caps on uncontracted sales of both gas and coal.

"Against this mixed backdrop, we stay selective into earnings," said Morgan Stanley. "We stay selective on stocks, anticipating wider dispersion this year, favouring leverage to Asia gas, free-cash flow yields and capital management initiatives,” analysts added.

In this piece, I'll share the six names and what you should know heading into reporting season.

Beach Energy (ASX: BPT)

BPT's half-year results are due on February 12th and Morgan Stanley expects to see earnings of $500 million, reflecting "staple production in FY23 with modest Brent oil and gas price headwinds in 2H23."

• UNDERWEIGHT rating with a $1.53 target price
• BPT "provides similar distribution yields vs. peers at relatively higher risk, in view of scale and development plans"
• The undemanding price target was due to BPT's reserve downgrades in 2021 and 2023 as well as a large portion of developing assets

Ampol (ASX: ALD)

Ampol's full-year 2022 results are due February 20th and expectations are that the company posts earnings of $1.7 billion, up 73% compared to the prior period.

• EQUAL-WEIGHT rating with a $30.14 target price
• Refining margins may have peaked and input costs "remain volatile" but tailwinds expected from driving and aviation
• Ampol viewed as a "measured investment in new energy" with longer-term positives such as EV charging and hydrogen mobility

Viva Energy (ASX: VEA)

Viva's has yet to announce a date for its FY22 earnings but EBITDA is forecast to jump 122% to $1.1 billion thanks to elevated refining margins.

• EQUAL-WEIGHT rating with a $2.99 target price
• The note cited a few concerns surrounding peak refining margins and weakness in consumer sentiment with the end of the fuel excise in September
• Viva received ACCC approvals for its acquisition of Coles Express, which was viewed as "logical, adding scale and focus, with moderate executing risk"

Santos (ASX: STO)

Santos' FY22 results are due on February 22nd, with expectations of US$4.9 billion in earnings, US$2.2 billion in net profit and free cash flow yields of 8.4%.

• OVERWEIGHT rating with a $9.28 target price
• Expectations of heavy investment over the next 3-4 years but balance sheet expected to stand up well
• "Santos has a portfolio of opportunities that work in a lower for longer oil price environment but it also retains leverage should oil prices increase ..."

Karoon Energy (ASX: KAR)

Karoon has provided an oil production guidance of 7.5 to 9.0 million barrels of oil equivalent (MMboe) for FY23 ahead of its February 22nd result, with Morgan Stanley expecting a midpoint figure of 8.5 million.

• EQUAL-WEIGHT rating with a $2.32 target price
• Stock risk-reward is viewed as balanced given its performance over the past 12 months relative to peers (+10.5%)
• Rising oil prices could see material upside, but also means Karoon "may have to pay higher prices for acquisitions"

Woodside (ASX: WDS)

Woodside's December quarter update marked a record quarterly production of 51.6MMboe and lifted full-year production to a record 157.7MMboe (guidance was 153-157MMboe). Operational excellence aside, Morgan Stanley expects FY23 earnings to fall -16% year-on-year to US$10.8bn, reflecting moderating energy prices.

• OVERWEIGHT rating with a $41.00 target price
• Lots of moving parts including: Equity selldown of Scarborough and Sangomar oil fields, FID for Triton, Mad Dog, Julimar-Brunello Phase 3, H20K projects
• Woodside's leverage for LNG is viewed as a differentiator among global peers. Also backed by a strong outlook for LNG