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Global financial markets are currently grappling with geopolitical and economic pressures, leading to heightened concerns among investors. The ongoing trade tensions between the United States and China are viewed not merely as political theatrics but as significant factors likely to hinder global trade volumes and corporate profits, ultimately impacting stock prices.
One of the most impacted segments of the economy is commodities, particularly the energy sector, which has already been struggling prior to the latest market turbulence. The S&P/ASX 200 Energy Sector Index has notably lagged behind other indices, with a stark 32% underperformance against the benchmark S&P/ASX 200 since reaching its peak in August 2023. This decline reflects a significant investor shift away from oil, gas, coal, and uranium stocks as prices in these markets continue to drop, influenced by ongoing energy transition trends and a slowing global economy.
However, amidst this challenging landscape, a new analysis from Australian broker Ord Minnett presents a hint of opportunity. Although acknowledging a bearish outlook for crude oil prices in the near term, the broker suggests there may be emerging value within the beleaguered ASX energy sector. They have revised their sector coverage based on updated earnings models and have implemented a "buy the dips" strategy targeting specific stocks.
Ord Minnett’s Crude Oil Price Projections
Ord Minnett has adjusted its forecasts for crude oil prices in light of recent production hikes from OPEC+, which have contributed to an oversupplied market. The broker underscores that concerns regarding global demand are still unresolved, primarily affected by trade war instability that hinders energy consumption, especially in industrial and transportation sectors.
Short-term projections indicate that oil prices will remain under pressure, with a revised forecast of US$60 per barrel for 2025, down from US$70, aligning with the current price of West Texas Intermediate Crude Oil at US$59.61/bbl. The 2026 forecast has also been adjusted to US$70/bbl from US$80/bbl. Ord Minnett maintains that a long-term price of around US$75/bbl is vital for encouraging investments in new oil supply, as many producers need prices between US$60 and US$70/bbl to secure financing.
Investment Strategy for ASX Energy Stocks
Ord Minnett’s historical data analysis offers a cautious yet optimistic view for ASX oil producers. They favour a targeted approach to "buying the dips," specifically identifying quality producers over exploratory firms. Their preference lies with companies that exhibit solid asset management and clear project execution.
Among the recommended producers are Karoon Energy (ASX: KAR), Santos (ASX: STO), and Woodside Energy (ASX: WDS), all of which the broker suggests are undervalued with share prices reflecting oil prices much lower than current projections. Woodside’s rating was elevated to "BUY" as the broker believes the potential risks have been adequately factored into its share price.
Additionally, Ampol (ASX: ALD) and Viva Energy (ASX: VEA) are highlighted as solid investments within the refining sector, thanks to their integrated operations which better position them to handle fluctuations in crude oil prices. Conversely, exploratory and utility companies were viewed less favourably.
Summary of Key Stock Ratings
- Woodside Energy (WDS): Upgraded to BUY with a price target reduced from $27 to $25 (upside potential of 25.4%).
- Santos (STO): Retained at BUY, price target cut from $8.20 to $7.50 (27.6% upside).
- Karoon Energy (KAR): Remains BUY, price target adjusted from $2.80 to $2.60 (83.1% upside).
- Ampol (ALD): Retained at BUY, price target holds steady at $34 (36.3% upside).
- Viva Energy (VEA): Retained at BUY with an unchanged price target of $3.40 (89.9% upside).
- APA Group (APA): Downgraded to ACCUMULATE from BUY, price target retained at $8.60 (2.9% upside).
- Strike Energy (STX): Downgraded to HOLD from BUY, price target remains at $0.31 (72.2% upside).
Conclusion: Value Perspectives in a Volatile Market
Despite the current uncertainties surrounding the global economy and fluctuating energy demands, Ord Minnett’s insights introduce a measured optimism for Australian energy stocks. Their revised forecasts highlight potential upsides even in a prevailing bearish sentiment, indicating that many ASX energy stocks are undervalued.
For the astute investor willing to assume calculated risks, there may be appealing entry points into these markets. Nonetheless, caution is advised, as the potential for significant price swings remains a critical consideration in this volatile sector.
