Our Q&As are emailed in our Saturday Morning Report, find the answer to this question below.
Hi James and team Thanks for your comments on energy ETFs on Friday. Woodside, Santos and other ASX listed stocks have come back a long way from their highs. Is there a buying opportunity? Middle East remains a ‘hot potato’ and surely Australian energy deserves a premium?
Hi Lindsay,
Following on from our ETF report on Friday here, both stocks have come back a long way, helped by the fact Brent crude is now trading around 28% below its May high and is very close to where it was before the latest Iran-related tensions began. In other words, the oil price has largely unwound the geopolitical premium, despite the Middle East remaining highly unpredictable.
Valuation is becoming more supportive. Both WDS and STO are trading at around a 20% discount to their longer-term valuation ranges, which suggests the market is already pricing in a more subdued oil-price outlook. That is not unreasonable, as we still think lower oil prices are a genuine possibility if global demand softens or geopolitical risk fades.
That said, the risk/reward has improved. Both companies remain high-quality Australian energy exposures, they are generating solid cash flow, and they are yielding around 5%, which provides some support while investors wait for conditions to improve.
Second-guessing the Middle East is always difficult, and we would be reluctant to buy energy purely on a geopolitical thesis. However, with the stocks already relatively cheap, the sector unloved, and dividends still attractive, we are comfortable calling WDS and STO accumulates at current levels.
In short, we do see value emerging, but we would prefer to build positions gradually rather than chase them aggressively.
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