Why It’s Time to Look for Energy Stocks

The ASX 200 is currently navigating a dynamic landscape, shaped by a combination of domestic economic pressures, sector-specific trends, and global market influences. Amid this complex environment, energy stocks stand out as a compelling medium-term play. In this article, we explore why the energy sector deserves close attention from investors and highlight key energy stocks that offer promising growth potential. What Is Impacting the Australian Equity Market? Interest Rates and Monetary Policy: The Reserve Bank of Australia (RBA) has maintained a cautious approach to interest rate hikes, influenced by stronger-than-expected retail sales data, which has tempered expectations for a rate cut before year’s end. This hesitation has put pressure on the banking and consumer sectors. However, in our view, energy stocks have demonstrated resilience, driven by external factors such as rising oil prices. Global Trade and Economic Data: Australia’s major trading partners, particularly China and the United States, are experiencing economic challenges, contributing to investor concerns about a global slowdown. Mining and Materials Sector: The materials sector, which is heavily reliant on commodity prices, has recently experienced profit-taking and a slowdown in share price momentum. Leading mining stocks, such as BHP and Rio Tinto, have come under pressure due to faltering iron ore prices. In contrast, we have observed a potential rebound in energy stocks, supported by global oil price movements. Energy Sector Performance: The energy sector has been one of the standout performers driving recent market sentiment. As oil prices surge due to escalating geopolitical tensions, the sector has benefited from increased investor interest. The S&P/ASX 200 Energy Index has risen by 9% in the past month, reflecting strong investor confidence and sector outperformance. Global Influences Shaping Energy Stocks Rising Oil Prices and Geopolitical Tensions: Global oil prices have experienced significant growth, with Brent crude oil increasing by 7.9% since early September. This surge is largely driven by geopolitical conflicts in the Middle East, particularly tensions involving key oil-producing nations like Iran and Saudi Arabia. We see these developments creating a favourable backdrop for oil companies, as concerns over potential supply disruptions have led to higher commodity prices, benefitting energy stocks. Major Energy Companies Recovering: Australian energy giants such as Santos, Woodside Energy, and Beach Energy have experienced a strong rebound in share prices. Santos, in particular, recently secured a lucrative LNG supply contract with TotalEnergies, indicating strong future cash flows. In our view, with the prospect of further oil price increases, these companies are well-positioned to continue delivering strong returns. Why We Believe Energy Stocks Are Set for a Rebound Given the current market landscape, we see energy stocks as an attractive option for investors seeking growth and stability. Here’s why we believe they present a compelling opportunity: Rising Oil Prices Boosting Profit Margins: Geopolitical tensions have driven oil prices higher, which directly benefits energy companies through increased revenues. We expect this trend to continue as the conflict in the Middle East persists, creating a supportive environment for Australian energy firms. China's recent economic stimulus measures: China’s economic stimulus announced in late September 2024, are expected to have a significant impact on the country’s oil imports. The People’s Bank of China (PBoC) implemented key policy changes, including cutting the reserve requirement ratio for banks and reducing mortgage interest rates, aimed at addressing a prolonged property crisis and deflationary pressures. We believe these measures, designed to stimulate economic growth and achieve a 5% GDP target for 2024, will likely increase industrial activity and consumer demand, driving higher oil consumption. In response, we have observed a slight rise in oil prices, indicating market optimism around increased demand from China. However, the full impact on oil imports will depend on the effectiveness of the stimulus in reviving the economy, as well as broader global oil market dynamics. We anticipate that, if successful, China’s oil import volumes will rise, contributing to shifts in global supply and demand. Favourable Market Sentiment Towards Energy: As global interest rates stabilize, we’ve noted that energy stocks appear to be benefiting from renewed investment. While other sectors may be weighed down by interest rate pressures or economic slowdown fears, we see energy stocks as a defensive play in the current environment. Five ASX Oil Stocks on Our Radar This Season Woodside Energy (ASX: WDS) We see Woodside Energy as an attractive investment opportunity in the medium term, particularly for those looking for exposure to the oil and gas sector with a solid dividend yield. The company reported a net profit after tax (NPAT) of $1.937 billion for the half-year, showcasing its operational resilience. Although underlying NPAT declined by 14% compared to the previous year, Woodside maintained an impressive payout ratio of approximately 80% by declaring a fully franked interim dividend of 69 US cents per share. CEO Meg O’Neill’s leadership has resulted in an outstanding reliability rate of 97.9% at Woodside’s operated LNG assets. A significant milestone was the commencement of production from the Sangomar project in Senegal, which achieved peak production rates of 100,000 barrels per day, highlighting the company’s world-class project execution. Moreover, we recognise Woodside’s progress on the Scarborough Energy Project in Western Australia, over two-thirds complete and on track for its first LNG cargo by 2026. The company recently sold a 10% non-operating interest in the Scarborough Joint Venture for $910 million and secured long-term LNG supply agreements with key players like Korea Gas Corporation and CPC Corporation in Taiwan. We are particularly intrigued by Woodside’s acquisition of Tellurian, which bolsters its LNG portfolio and provides additional exposure in the Atlantic basin. The company is also advancing into new energy sectors, including the Hydrogen Refueller @H2Perth and carbon capture and storage projects, which demonstrate its commitment to sustainability. That said, with its solid dividend yield, operational strength, and strategic initiatives, we view Woodside Energy as a compelling medium-term investment opportunity. Santos (ASX: STO) Santos Limited (ASX: STO) presents a compelling investment opportunity, particularly for income-focused investors, with a robust dividend yield of approximately 4.40%. The company recently reported a record interim dividend of US13.0 cents per share, reflecting a 49% year-on-year increase. While free cash flow from operations declined slightly to US$1.068 billion, Santos demonstrated strong financial resilience, posting sales revenue of US$2.711 billion and underlying profit of US$654 million. The disciplined cost management and low-cost operating model underpinning its business enable Santos to navigate market fluctuations effectively, ensuring reliable cash returns for shareholders. Looking ahead, we see significant growth potential from Santos’ major projects. The Moomba Carbon Capture and Storage (CCS) project is nearing completion, positioning the company as a leader in sustainable energy initiatives. Additionally, the Barossa Gas Project, set to come online in 2025, and the Pikka Project, expected to yield first oil in 2026, will further enhance its liquefied natural gas (LNG) portfolio. With unchanged guidance for 2024 and a focus on operational stability, Santos is well-equipped to deliver strong returns and align with long-term energy trends, making it a solid medium-term play. Ampol (ASX: ALD) Ampol Ltd (ASX: ALD) has demonstrated resilience in the energy sector, reporting a Replacement Cost Operating Profit (RCOP) Earnings Before Interest and Tax (EBIT) of $502.1 million in the first half of 2024, alongside a Statutory Net Profit After Tax (NPAT) of $235.2 million. This solid performance has contributed to an 8.4% rebound in its share price over the past month, supported by the declaration of a fully franked interim dividend of 60 cents per share, representing a 61% payout ratio of RCOP NPAT. We appreciate Ampol’s commitment to delivering consistent returns, highlighting its ability to navigate challenging economic conditions in Australia and New Zealand. We recognize that the company’s diversified operations in Fuels and Infrastructure (F&I) have shown resilience, with F&I Australia reporting steady EBIT of $140.7 million, driven by a 1% increase in wholesale volumes. Ampol’s strategic focus on premium fuels has enhanced margins, effectively offsetting lower retail volumes. Additionally, its New Zealand segment has benefitted from the acquisition of Z Energy, which recorded a 3.9% increase in EBIT. We are particularly impressed by Ampol’s initiatives, such as the rollout of the AmpCharge electric vehicle charging network, which positions the company well for future growth. With a robust balance sheet, net borrowings of $2.555 billion, and a liquidity position supported by $5.2 billion in committed facilities, we find that Ampol maintains strong financial stability. As current trading conditions continue to reflect positive trends, we believe that Ampol presents a compelling medium-term trading opportunity. The company’s ability to adapt to changing market dynamics, combined with its strategic growth initiatives, positions the business well going forward, with the potential for steady income through dividends and capital appreciation.