Energy, the crucial component to our lives that keeps our tea hot and our beer cold, has been lagging other industries over the last year. While the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up almost 20% for the last 12 months, some of the largest energy producers and retailers have lost value or are up only marginally.
Santos Limited (ASX: STO), for example is down about 10% which can be seen in the chart below; Origin Energy (ASX: ORG) is down 6%, while Beach Petroleum (ASX: BPT) and Woodside Petroleum (ASX: WPL) are up just 5% and 12% respectively.
Source: Yahoo Finance
Woodside in particular has had a strong year, with a full year of production from its Pluto LNG facility allowing the company to announce a special dividend for shareholders and progressing plans for the next stage of the company’s Browse LNG production.
So why are they lagging? One reason could be uncertainty around carbon taxes on energy companies and the degree to which it will eventually impact the companies’ bottom line. Origin chief executive Grant King has said the country’s carbon tax policies put Australia at a competitive disadvantage and that the laws are way out of line with the rest of the world. Tony Abbott has called it a “toxic tax” and apparently declared a “blood oath” that he will remove the policy if elected in September.
A second uncertainty is around how the price for natural gas and LNG will perform over the long term and potential competition from US shale gas. This is possible, but over the last 12 months natural gas prices have increased by 20%, measured by Standard & Poor’s GSCI Natural Gas Index.
A third contributor is likely the demand for higher dividend yields paid by companies in other industries. This is supported by the jump in Woodside’s share price after announcing a special dividend in April before falling back again.
There may be plenty of uncertainty around the industry at the moment, but the lagging price of energy companies is a great opportunity for patient investors.
Santos and Origin both have significant gas projects set to come online in the coming three years which will deliver big cash flows at prices locked in through long-term supply contracts. For its part, the carbon tax looks set to be a part of the energy industry’s future in some form regardless of who is in power.
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