While the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) eked out a small gain on Thursday, shareholders in gas and electricity provider AGL Energy Ltd (ASX: AGK) watched on as their stock fell 5.4% to close at $14.93. It’s a dramatic fall for a blue-chip stock and came as a result of the release of guidance for financial year (FY) 2014 and an updated outlook for FY 2015.
Needless to say, investors didn’t like what they read!
The announcement stated that AGL will meet FY 2014 market guidance for an underlying profit of $561 million – that was the positive news.
The negative news was the abolition of the carbon tax, coupled with the closure by Caltex Australia Limited (ASX: CTX) of its oil refinery. This will have a knock on effect by forcing AGL to close its LPG extraction plant. Together the news is forecast to reduce earnings before interest and tax (EBIT) in FY 2015 by $200 million!
That however is not the end of the story. The release went on to state that: “AGL expects the combined gross reduction in EBIT of approximately $200 million to be largely offset by very strong growth in the rest of the business.”
Clearly the market was shocked by the hit to earnings, however once the dust settles, investors may think a little more deeply about the significant growth AGL is forecasting in its remaining businesses.
Assuming this is a once-off hit to earnings as a result of the carbon tax debacle, FY 2015 guidance actually paints the group’s operations in a positive light given the underlying “very strong growth” AGL is expecting.
An even better bet
For investors wishing to add energy exposure to their portfolios, the need for more clarity around AGL’s future earnings may leave a cloud over the stock for a while. In the meantime, there are two energy stocks which are set to meaningfully grow their earnings thanks to their respective investments in LNG projects. The most diversified (thanks to its retail and generation assets) and perhaps least risky of these is Origin Energy Limited (ASX: ORG) and hence it may be the better fit for many portfolios.
Meanwhile for more concentrated energy exposure Santos Ltd (ASX: STO) offers a more leveraged play on both oil and gas prices and Chinese economic growth.
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Returns as of 6th October 2020
Motley Fool contributor Tim McArthur owns shares in Origin Energy Ltd.
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