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Australia’s bargain energy plays

Lex Hall  |  25 Sep 2020Text size  Decrease  Increase  |  
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Australian energy stocks are cheap. How cheap? Well, according to Morningstar energy analyst Mark Taylor, there are discounts of up to 60 per cent on offer. Why? In a word, the covid shutdown has punched a hole in near-term demand and led to a meltdown in energy prices.

But the market seems to think the bearish outlook will last forever. Taylor argues this view makes no sense. “US shale still accounts for over 10 per cent of global oil supply,” Taylor says, “and unless prices rebound to encourage drilling, a current supply glut will ultimately become a shortage.”

Brent crude is currently about US$40 a barrel. But Taylor forecasts it will hit US$60 a barrel. “Demand should recover when economic activity resumes, and we think consumption could approach pre-COVID-19 levels before 2022.”

The key question is: which companies can hang on until then? Those with cash in the bank and low operating costs. Taylor singles out four companies that are fit enough to last, the pick of which is Woodside Petroleum. It’s trading at a 60 per cent discount to Taylor’s fair value estimate of $44.60.

A picture of offshore rig seen from the shore at sunset

Brent crude is currently about US$40 a barrel. But Morningstar's Mark Taylor forecasts it will hit US$60 a barrel. 'Demand should recover when economic activity resumes, and we think consumption could approach pre-COVID-19 levels before 2022'.

“Woodside is well suited to the development challenge,” Taylor says. “With extensive experience, it remains a stand-out energy investment at the right price. Gas is the fastest growing primary energy market behind coal, and the seaborne-traded LNG portion of that gas market grows faster still. China is building several import terminals, and so demand is likely to pick up, helping to move LNG pricing toward oil parity on an energy-equivalent basis.” You can discover the other Australian energy players trading at steep discounts to Taylor’s fair value estimates here.

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Morningstar's Global Best Ideas list is out now. Morningstar Premium subscribers can view the list here.

is senior editor for Morningstar Australia

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