As the Organisation of Petroleum Exporting Countries appears poised to extend production cuts into 2018, the equity strategists at Deutsche Bank have highlighted the opportunities that exist in the Australian energy sector, which despite above-market earnings per share growth has not yet seen major benefits from OPEC's attempts to reduce the global oil glut.
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As oil prices began to plunge in 2015, ASX energy stocks were dragged sharply lower. The price of brent oil has since doubled from its $US26.21 a barrel low in February 2016, trading at $US51.69 a barrel on Thursday after several days of strong growth, but the S&P/ASX200 energy index has grown only 44.9 per cent since the 2016 low.
The relative underperformance of ASX energy stocks - which include Woodside Petroleum, Santos, Oil Search, Caltex and Origin Energy - has occurred despite these energy companies having posted earnings per share growth considerably higher than the broader market since 2016, wrote Deutsche Bank equity strategist Tim Baker. The trend has accelerated further this year.
In some ways, the historically close relationship between energy companies and the oil price replicates the situation in the Australian mining sector, where since the mining boom share prices have correlated strongly with commodity prices. This shouldn't necessarily be the case, Baker wrote in a May 18 note on the topic.
"Companies should be able to create value independent of moves in selling prices, through avenues such as volume growth and development of new assets," he wrote.
When it comes to ASX energy stocks, his analysis shows a historically close relationship until the global financial crisis. But as the oil price sharply plunged in 2007 and 2008, energy stocks still managed to perform well relative to the rest of the market. When the oil price caught up around 2011, there was another period of close correlation, which continued as the oil price fell to GFC levels in 2015. This time, however, ASX energy stocks haven't participated in the recovery.
High hopes
This is despite the strong earnings in the sector. But Baker is bullish on what will happen to energy companies in the future, partly as, like mining stocks, most energy companies have moved past a period of high capital expenditure. "In the past share prices have done well in that stage," he wrote.
Deutschbank recommends heavy exposure to Oil Search and Woodside Petroleum, but has removed Santos from its model portfolio. "Woodside is the quality, liquid name in the sector - low cost, [with a] high dividend yield of 4.5 per cent."
On Santos, Mr Baker wrote that "we do like the longer-term valuation story". "But with the overhang of the government's gas policy that could keep that value unrealised for a while."
On Thursday, Deutsche Bank also upgraded energy engineering consultancy WorleyParsons to a buy, with research analyst Craig Won-Pan writing that the "energy and resources industry is at an inflection point and returning to growth". Macquarie also upgraded WorleyParsons to a "buy" after its investment day in Sydney.
Also hosting an investor day this week was Woodside, whose CEO Peter Coleman said he expected brent crude to average $US55 per barrel in 2017, rising to $US65 per barrel from 2018.
Energy tends to be a strong performer in May, with the sector gaining, an average of 2.9 per cent in the month since 2000, according to analysis by Bell Potter's veteran stockbroker Richard Coppleson. This month does not appear to be an exception, with the sector growing 6.2 per cent so far in May after seesawing for the previous four months of the year. Brent Crude is up 5.8 per cent in May, and is up 16.7 per cent from a low on May 5.