Why now might not be the time to buy Origin Energy Ltd shares


It’s often said that investing is as much an art as it is a science.

The fact that investment decisions aren’t simple and clear cut can lead to seemingly contradictory views about the same company. In reality however, what is often happening is that new facts, different prices and different opportunity sets have entered the equation.

For example, I am on record as suggesting that with the oil price slumping over the past two years “now” is the time in the cycle when contrarian investors who are looking for undervalued stocks should be scouring the energy sector for opportunities.

I’ve previously singled out Origin Energy Ltd (ASX: ORG) as a particularly interesting play, given its significant retail and power generation assets can be valued without reference to the oil price.

Woodside Petroleum Limited (ASX: WPL) is another key stock to watch in the energy sector given its size and the potential for it to make strategic acquisitions during the present cyclical lows.

Picking the bottom of a cycle is a near impossibility but it’s natural for investors to be price conscious – you wouldn’t buy a share today if you felt certain it would be cheaper tomorrow.

This is where new information plays a major part in changing viewpoints.

So, although I could be described as a long term bull on specific oil and gas producers, right now I’m not a buyer because I think there could be better buying opportunities just around the corner.

Here’s why

Growing supply glut. The latest figures suggest OPEC production continues to climb and that the number of US oil rigs is also on the march higher once again. The problem with this trend is that it suggests it will take longer for the market supply-demand dynamics to settle at a higher oil price.

It’s not just OPEC nations that are boosting supply either.

Last week’s quarterly production report from Origin highlighted the fact that Australia’s newly switched on LNG projects are having a massive effect on global energy supply.

Origin reported a 57% increase in full year oil and gas production. Santos Ltd (ASX: STO) and Oil Search Limited (ASX: OSH) with their respective LNG projects are also major new contributors to the global LNG market.

Oil price softening again. After Brent crude hit a low of around US$32 a barrel in January 2016 the price enjoyed a strong bounce to over US$50 a barrel. Since hitting that recent high, oil is now down roughly 20% and trading at just over US$43 a barrel, but in my opinion it could still fall further.

How 1 Man Turned $10K Into Over $8 Million

Wondering what stocks could be a BUY right now? The Motley Fool's top analysts have some key stock ideas for you. Discover how one man turned a modest $10,600 investment into an $8,016,867 fortune. Learn more about this man and how you can start down the path toward financial independence. Simply click here to learn more.

Motley Fool contributor Tim McArthur owns shares in Origin Energy Ltd. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

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.