The beaten-up sector offering value and 2 ASX stocks that could lead a turnaround

Whichever way you slice it, the ASX energy sector has been a perennial underperformer over the past five years. Aside from a huge 39% return in 2022, the sector is down in four of the past five calendar years, with energy names collectively down around 20% in 2024, and already down a further 10% so far this year. 

So, what gives? Do we have weak energy companies here in Australia or is it a symptom of global energy malaise, and when is the sector due for a turnaround?

To find out, I spoke with Tim Zhao, Portfolio Manager and Analyst in the Australian Equities team at Lazard Asset Management, to get his take on the sector’s performance, where it’s headed, and the stocks he believes offer value right now.

Not just an Aussie problem – but we’re lagging hard

Zhao is quick to point out that energy sector weakness is not just an Australian issue.

“The recent energy sector weakness is not confined to the ASX, but the lag in performance of our energy sector compared to global peers has been much more pronounced over the last five years,” he says.

Zhao believes total return, not just price performance, is the right metric to focus on, especially in a sector where cyclical dynamics drive both dividends and capital returns. And on that front, the numbers are telling.

“Since 2019, the US energy sector has delivered a total return of 100% as of 16 May 2025, ranking 7th out of 11 GICS sectors (and 5th at the end of March). In Europe, the STOXX Energy sector total return index delivered 46%, ranking 15th out of 20 sectors.”

Meanwhile, the Australian sector, despite its greater exposure to natural gas over oil, has materially underperformed.

“The ASX sector has derated and now trades at a significantly lower price-to-book (P/B) multiple than the US and European peers, and is at a 35% discount to its own historical median.”

Energy transition: more nuanced than it looks

With the global push toward decarbonisation, many investors have assumed the energy transition is behind the sector’s troubles. But Zhao says the story isn’t that simple.

“The electrification of the economy driven by the energy transition is negative for oil but positive for gas,” he explains. 

“Electric vehicles reduce petrol demand but increase electricity needs, and gas - able to ramp up quickly - remains the best baseload and backup for renewables.”

Zhao also highlights an emerging tailwind for the sector that’s getting more attention: AI.

“It is estimated that the rate of global energy demand growth may double due to the energy requirements of AI data centres. About 10% of US electricity may be required to power data centres by 2028, for example. Again, this raises demand for gas, but not oil.”

In other words, the long-term demand picture, particularly for gas, may be stronger than the market is currently pricing in.

Signs of life: what could drive a rebound?

So, when might the Australian energy sector finally catch a break?

Zhao sees several potential catalysts—both macro and micro—that could kick off a turnaround.

MACRO

"Easing tariff concerns, stronger Chinese government stimulus supporting energy demand, and limited US shale growth unless oil prices rise,” he says. 

“Stricter OPEC+ production quotas, tighter sanctions on Iranian and Russian supply, and low OECD inventories could also tighten the market.”

MICRO

On the micro side, individual stock events could also boost sentiment.

“Stock-specific catalysts include Woodside’s further sell-down in its Louisiana LNG project and Santos beginning production at its offshore Barossa project later this year.”

VALUATION

And then there’s the valuation argument.

“The sector is currently oversold following US tariff announcements, making valuations among the most attractive since 2009. 

"On a cyclically adjusted price-to-earnings (CAPE) basis, the sector [is] by far the cheapest, sitting well below its historical average, at a time when other sectors trade on higher than usual multiples" says Zhao.

What could keep the sector down?

While Zhao sees reasons for optimism, he doesn’t downplay the risks.

“The macro factors mentioned above are by their nature uncertain, and economic weakness would weigh on energy prices,” he warns. 

“In particular, the market is concerned by the possibility of US and global stagflation or at least an unfavourable combination of growth and inflation.”

Still, history suggests that under such conditions, energy stocks may prove more resilient than expected.

“Perhaps surprisingly, under these conditions, Energy was one of the sectors that historically outperformed. Similarly, energy has been one of the global sectors with the lowest betas to global economic growth, presumably reflecting inelastic demand," he says.

How do Aussie energy names stack up globally?

Compared to global peers, Zhao sees both strengths and weaknesses in the Australian energy complex.

“A key strength is our geographic proximity to Asia, the world’s fastest-growing energy market. LNG shipments from Australia to Asia take just eight days, significantly faster than from Qatar or the US, giving Australian exporters a logistical and cost edge in meeting regional demand," he says.

But not everything is rosy.

“Australia’s uncertain policy stance on project approvals and environmental standards has become more pronounced than in many other developed markets,” he notes. 

“Additionally, the sector’s high concentration, with only a few dominant players, can limit diversification compared to more fragmented energy markets overseas.”

Two stocks that could shine

Among ASX energy names, two stand out in Zhao’s portfolio: Woodside Energy (ASX: WDS) and Viva Energy (ASX: VEA).

On Woodside, Zhao is clear: 

“Woodside is trading at a 25% discount to book value, a level last seen during COVID, offering compelling value.”

He’s encouraged by both the company’s operational execution and its strategic positioning.

“The company has demonstrated strong operational performance, maintaining high asset reliability and robust production, particularly with the successful ramp-up of Sangomar," he notes.

"Management is actively optimising funding for growth assets, with potential further sell-downs of its Louisiana LNG project to unlock value.”

With EBITDA margins above 70% and a shift toward more gas and LNG production, Woodside has strong defensive characteristics.

“Woodside enjoys a low break-even oil price and EBITDA margins exceeding 70%, and is targeting an increase in gas/LNG production from 60% to over 70% of total output by decade’s end, with more growth coming from North America.”

On Viva, Zhao sees a turnaround story in progress.

“Viva Energy, meanwhile, faced recent operational challenges due to a bloated cost base after acquiring three convenience businesses in the past two years,” he says. 

“Although integration has taken longer than expected, we anticipate improved profitability as network costs are rationalised and the on-the-run network conversion lifts per-store earnings, implying an EBIT multiple of less than 6x at current prices.”

The final word

After years of trailing global peers, the Australian energy sector appears oversold, and perhaps misunderstood. 

With valuations at multi-decade lows, geopolitical catalysts building, and new secular demand drivers like AI entering the frame, the stage may be set for a shift in sentiment.

“The sector is currently oversold … making valuations among the most attractive since 2009.” 

For long-term investors, that might just be the spark they’ve been waiting for.

Managed Fund

Lazard Australian Equity Fund (W Class)

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