Woodside, Santos attractive, but this is the cheapest stock in ASX energy: JP Morgan

In a research report released this week, major broker JP Morgan provided an update on its price estimates for Brent crude oil. The broker’s last update was in October last year, and plenty has happened in the crude oil market since then – not the least, a conflict in the Middle East.

JP Morgan noted that the price of Brent crude oil had experienced a “sharp correction” since their last review. Despite this, the broker’s forward price estimates for Brent crude are “broadly unchanged”, with only a minor reduction from mid-2024, and then again from late-2025. JP Morgan sees the Brent crude price trading around US$80/bbl this year before declining to around US$70/bbl next year. The price of Brent crude at the time of writing is US$77/bbl.

JP Morgan notes their crude price assumptions have triggered several adjustments to EBITDA estimates across its ASX energy coverage, changes are shown in the table below.

JP Morgan describes the amendments to their earnings forecasts for ASX energy companies as only “modest”. More impactful, however, have been recent moves in company stock prices which have made some look expensive, and others look cheap. On the whole, JP Morgan notes that “value has emerged in the Energy sector”, while the valuations among refiners are comparatively “full”.

In energy, Woodside Energy (WDS) remains the broker’s preferred exposure, followed by Karoon Energy (KAR), Santos (STO) and Beach Energy (BPT). Refiners Viva Energy (VEA) and Worley (WOR) are described as “least preferred”. JP Morgan’s commentary on each company in its energy sector coverage is summarised below.

Woodside Energy (ASX: WDS)

• Attractive traits include a strong balance sheet, good production growth, low costs

• Notes as “Largest, most-liquid and globally relevant” of broker’s ASX energy coverage

• Share price decline means it’s now one of the cheapest in sector

• Potential Santos acquisition has caused some to shun Woodside, but this may create an opportunity

• Woodside trades below broker’s $34.80 price target (raised from $34.20)

• Rating is upgraded to Overweight (from Neutral) on valuation grounds

Santos (ASX: STO)

• Focus in the short term remains potential Woodside transaction – could be “major catalyst” for Santos

• Likes company’s diversification, sensible growth strategy, but most importantly, valuation

• Consensus estimates have moderated, more reasonable, so less chance of market disappointment

• Santos trades below broker’s price target of $8.40 (raised from $8.05)

• Remains “positive”, so retains Overweight rating

Beach Energy (ASX: BPT)

• Beach is “best exposure of the big cap stocks to east coast gas”

• Beach has “attractive valuation metrics”

• Operational issues are likely already represented in stock price

• Despite the above positive traits, still prefers Woodside and Santos in sector

• Price target is unchanged $1.75

• Retains Overweight rating

Karoon Energy (ASX: KAR)

• Stock price slump in wake of Who Dat acquisition may present an opportunity for investors

• Broker sees “good value” in Karoon, suggesting it’s the “cheapest” within its ASX energy coverage

• Stock price is “well below” brokers $2.80 price target (raised from $2.75)

• Retains Overweight rating

Carnarvon Energy (ASX: CVN)

• Recent board and management reshuffle is likely reason for strong stock price performance

• Carnarvon now trades above broker’s valuation

• Funding and Dorado development schedule remain key risks

• Price target is unchanged at $0.22

• Downgrades to Neutral (from Overweight) on valuation grounds

Cooper Energy (ASX: COE)

• Cooper is broker’s preferred pick among small-cap cohort

• Broker notes uncontracted gas continues to increase, likely to enjoy favourable repricing

• With Orbost operational issues now “largely behind” Cooper, better production flows could lead to a market rerating

• Price target is unchanged at $0.16

• Retains Overweight rating

Ampol (ASX: ALD)

• Ampol is “fairly valued” but is the “cheaper” of the refining stocks the broker covers

• Earnings tailwinds include increasing retail fuel volumes and tight refiner margins

• Consensus earnings are below broker’s estimates, this creates scope for external earnings upgrades

• Price target is $38.10 (raised from $37.50)

• Rating is downgraded to Neutral (from Overweight) on valuation grounds

Viva Energy (ASX: VEA)

• Prefers Ampol in the refiners

• Broker suggests Viva paid too much in recent OTR acquisition

• Recent strong refiner margins would likely assist Geelong Refinery performance and contribute to a strong quarter

• Recent stock price gains mean Viva trades above $3.30 price target (raised from $3.15)

• Rating is downgraded to Underweight (from Neutral) on valuation grounds

Worley (ASX: WOR)

• Underlying business conditions are “clearly improving”

• Expects strong earnings growth in near term.

• Main concern, however, is the valuation – Worley is trading on “elevated valuation multiples”

• Worley trades above broker’s price target of $13.50 (raised from $13)

• Retains Underweight rating on valuation grounds

This article first appeared on Market Index on January 12 2024.