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.

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

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