Oil rally sends ASX energy shares rocketing today

Brent crude futures lifted above the psychologically important US$40 per barrel level on Thursday morning as traders bet the supply side may be squeezed into a production freeze at an upcoming OPEC meeting in Doha on April 17.

The share prices of energy majors Santos Ltd (ASX: STO), Woodside Petroleum Limited (ASX: WPL) and Oil Search Limited (ASX: OSH) are all up between 1.2% and 5.5% today in some welcome relief for long-suffering investors.

Whether OPEC can agree on anything material in Doha such as production limits or freezes is anyone’s guess, with the likes of Saudi Arabia, Russia and Venezuela reportedly to be joined by Iran in a politically volatile mix.

Investors in ASX energy shares  also need to consider whether the physical market fundamentals for energy prices justify holding energy stocks with the supply and demand imbalance in oil markets not expected to change until 2018.

Due to its large amount of debt, Santos is probably the most high risk / high reward energy play among the large caps.

It was forced to raise about $3.5 billion in capital in late 2015 via asset sales and a $2.5 billion capital raising. As a result the business had $4.8 billion in cash and undrawn debt facilities at the end of 2015.

This provides a substantial capital buffer to ride out lower oil prices, but will they recover on a sustainable basis?

Santos still has $6.5 billion in net debt to service largely as a result of huge capital expenditures on its Gladstone LNG project and it remains a high-risk prospect even after losing half of its value over the course of the past year.

In my opinion investors looking to bet on a recovery in oil prices would be better off focusing on those with the strongest balance sheets such as Woodside or Oil Search.

New Potentially Life-Changing Share Picks Just Released

The Motley Fool's renowned dividend investing guru recently revealed his newest dividend buy recommendation and short list of 3 Best Dividend Buys Now. Which means if you're reading this message right now, you're not on the list to uncover their names before they potentially go gangbusters. Simply click here to learn more about these shares.

Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

HOT OFF THE PRESSES: My #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.