UBS downgrades these 2 oil stocks after their 30% surge in 3 months

There’s such a thing as too much of a good thing. The improving outlook for oil has catapulted our large cap energy stocks to 52-week highs, but it’s the surge in the share prices of Santos Ltd (ASX: STO) and Origin Energy Ltd (ASX: ORG) that has raised the eyebrows of analysts at UBS.

Commodities have a notorious reputation of overshooting on the up – and downside, and it seems Santos and Origin may have followed suit, after they both rallied a little over 30% each in just three months.

It’s not only the resilient oil price that is keeping the stocks floating on plumes of high expectations!

Santos has been winning over investors on takeover rumours by US private equity group Harbour Energy, while Origin has been on a tear since starting up its APLNG project and cutting its debt, which is fuelling (all pun intended!) expectations that Origin will reinstate its dividend.

“With oil prices recovering much faster than most analyst expectations, we anticipate significant consensus EPS and price target increases in the near term,” said UBS.

“We expect OPEC will be successful in bringing global oil inventories back to five-year average levels this year, though rebalanced inventories will make oil more susceptible to geopolitical events.”

Fears about how electric vehicles will take over the world have certainly abated.

But the good news is factored into Origin’s current share price of $9.40 and UBS has downgraded the stock to “neutral” from “buy”; while Santos has rallied too far ahead of the broker’s $5.20 price target – forcing UBS to cut the stock to “sell” from “neutral”.

However, this isn’t to say there are no energy stocks worth buying at the moment. UBS has kept its “buy” rating on Woodside Petroleum Limited (ASX: WPL) and upped its price target to $38.10 a share from $35.

It also rates AGL Energy Ltd (ASX: AGL) a “buy” with a price target of $29.50 a share vs. its current price of $24.04.

While the broker has also maintained its “neutral” rating on Oil Search Limited (OSH) with a price target of $8.05 a share, the stock is a hot favourite of other brokers who believe Oil Search offers the best upside exposure to the high crude price – assuming the commodity can hold on to its gains this year.

Those that believe oil will resume its slide back towards US$50 a barrel may want to look elsewhere for opportunities. The experts at the Motley Fool have uncovered one such sector that is well placed to make a big splash in 2018.

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Motley Fool contributor Brendon Lau owns shares of AGL Energy Limited. 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.

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