Investor Spotlight: The top shares in the ASX energy sector

This issue of Investor Spotlight is brought to you by IG, with Kyle Rodda, Market Analyst and ausbiz presenter.

In this week’s Investor Spotlight, we look at the ASX energy sector and drill down as we pick three blue-chip companies to watch going forward.

What’s happening in the global energy markets?

It’s been an almost perfect storm for global energy markets over the past year. Surging demand at a time of very tight supply has seen prices for oil, coal, and gas soar, with several factors driving the dynamic. On the demand side, huge amounts of fiscal and monetary stimulus pump-primed the global economy following the pandemic.

More importantly, however, was a string of events that caused tremendous energy scarcity.

From a structural point of view, underinvestment in old, dirty energy sources as policymakers attempted a transition to new sustainable energy generation has led to a lack of abundant, secure, and reliable energy. Meanwhile, the Russian invasion of Ukraine has weaponised trade in oil and natural gas, with the Putin regime cutting exports into Europe, sending prices soaring.

Reviewing the performance of the ASX energy sector

The ASX energy sector has outperformed the broader market over the past 12 months. With inflation driving so much of inflation, and inflation and subsequent interest rate increases behind the general weakness in equities, energy stocks have become a hedge and haven in a bearish market backdrop. The Australian economy is very energy-rich, so a robust and diverse energy sector exists for local investors.

In the one year to September 16, the ASX energy sector was up over 37.5%, versus the broader market which was down nearly 9%. The upside momentum has slowed more recently due to moderating energy prices amidst global growth concerns but nevertheless, it remains an outperformer across the three-month and six-month time frames.

Three ASX energy stocks to watch

Here we drill deeper into the energy sector and identify three ASX-listed stocks to watch.

• Woodside Energy Group (WDS)

Woodside Energy is Australia’s largest oil and gas producer, with a current market capitalization of around $62 billion. The global energy crisis has seen the company’s share price almost double since the beginning of the pandemic.

Given its size and scale, Woodside is a relatively safe play for investors in the domestic energy sector. The stock has a beta of 1.25 and trades low relative to its historic P/E ratio. However, that reflects the short-term run-up in earnings from the energy shock and a discount in price for weaker longer-term growth prospects due to the global energy transition.

The short-term prospects are considered strong for Woodside; however, the current dividend yield is above 13% and despite some recent downgrades, analysts remain largely optimistic about the stock, with a consensus ‘buy’ rating amongst 15 surveyed analysts and a price target of $36.65.

The charts look less constructive for Woodside’s stock. Price is carving out an ascending wedge, often a sign of a coming pull-back and the RSI is also grinding lower, suggesting building downside momentum. Major resistance exists at around $36.00 per share, while $30.50 appears as a level of support.

Woodside Energy Group weekly chart

• Santos Limited (STO)

Sitting number two behind Woodside is Santos. Another blue-chip company, Santos boasts a market capitalisation of roughly $26 billion.

Although it has delivered an enviable one-year return of 26%, which amounts to only half of what Woodside has, it also has a higher beta of 1.92 and a lower dividend than its larger counterpart. On the plus side, it does trade at a more attractive multiple.

Nonetheless, the analyst community is more bullish on the prospects of Santos as out of 16 analysts surveyed, all have either a buy or strong buy recommendation, according to Reuters data. Current prices also trade at a larger discount to the consensus price target, which is currently around $9.57.

The charts paint a mixed picture for Santos shares. The stock is in a primary uptrend, momentum is neutral, with a formidable area of resistance at $9.00 and the price currently trades around support resistance at $7.70. Trendline support is around $7.00, which almost coincides with the 200-week MA.

Santos Limited weekly chart

• Whitehaven Coal (WHC)

Moving away from oil and gas, Whitehaven Coal is another company that has seen its stock go from untouchable to almost unbackable.

As we discussed here last week, Whitehaven Coal was one of ASX’s stellar performers in August after delivering solid full-year earnings and providing very upbeat guidance for the new financial year.

A shortage of thermal coal amidst huge demand for electricity has seen Whitehaven’s share price double in the past year but remarkably, the company trades on a very low beta of 0.60 despite its cyclicality.

In large part due to its association with dirty energy, Whitehaven stock trades at a low multiple with investors pricing in a hefty ESG discount. Analysts remain constructive on the stock, nevertheless, with a consensus buy rating amongst 13 analysts for a price target of $8.85.

Whitehaven boasts an extraordinary chart, with prices going parabolic recently. The price remains in an uptrend for now but risk/reward is likely unattractive at these levels, with the RSI in deeply overbought territory and beginning to move lower. Buyers may re-emerge at support around $7.30.

Whitehaven Coal Limited weekly chart