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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.

In Firstlinks, Graham Hand wonders whether this week’s hints of a stock correction will scare off the “Robinhood” traders. “What happens when these new players realise markets do indeed fall and their options are well out-of-the-money and likely to expire worthless?” Hand writes.

Also in Firstlinks, Hand hears from Thomas Rice, who manages the Perpetual Global Innovation Share Fund, which delivered 43 per cent in the last year by finding the best new ideas around the world. Rice describes his biggest positions and what he likes and does not like in global tech. He’s also got a compelling small-cap idea closer to home.

Elsewhere, Emma Rapoport sits down with Morningstar resources analyst Mat Hodge to discuss the fallout from Rio’s Juukan Gorge disaster. The destruction of an indigenous cave shelter was unforgiveable but there are other reasons why the iron ore heavyweight is overvalued, Hodge says.

Anthony Fensom examines investing for the recovery with exchange-traded funds. Whether the rebound is V, U or L-shaped there’s a portfolio mix to suit your risk profile, Fensom says.

Morningstar equity analyst Kristoffer Inton has been surveying the cannabis landscape and the potential for growth. In ten years’ time, you won’t be illegally smoking cannabis, Inton notes, you’ll be legally eating it. And he has some stocks to watch.

Speaking of cannabis, Tesla’s Elon Musk this week announced the company’s plan to introduce a cheaper model by 2023. Morningstar’s David Whiston has increased his fair value estimate for the electric vehicle giant but has doubts about the Tesla fleet’s mass-market potential.

Have you lost sight of the link between the way your portfolio is designed and the reasons you are investing in the first place? If so, Mark Lamonica helps you reset your investing goals.

The dollar’s slide to 70 US cents brings into sharper focus currency risk. Nicki Bourlioufas looks at how to get your hedging strategy right.

Morningstar banking analyst Nathan Zaia takes the pulse of Westpac following the record fine it copped this week. The bank can absorb the $1.3 billion Austrac fine and build earnings momentum provided the withdrawal of covid stimulus doesn't bite too hard, Zaia says.

And finally, in Your Money Weekly, investors and speculators banking on pandemic-driven growth to continue could be in for a shock, says Peter Warnes.

“The recent rotation out of the FAANGs and Microsoft, the leaders of the record-breaking surge in the tech-dependent Nasdaq Composite and the wider-based S&P 500, does beg the question: where are the new leaders?” Warnes writes.

“It appears the answer is: there is no alternative, with investors and speculators prepared to extrapolate non-recurring pandemic-driven growth rates in revenue and earnings well into the future to justify the prices they are paying. I fear some disappointment awaits.”

 

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

is content editor for Morningstar Australia

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