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Top broker warns the oil party is over for Woodside Petroleum Limited (ASX:WPL)

Our oil and gas stocks may be on an inevitable upgrade cycle with the price of crude surging by over 50% in the past year and looking to stay stronger for longer, but JP Morgan believes the party’s already over for two stocks in the sector.

The downbeat assessment stands in contrast to bullish market sentiment towards the sector with the Brent crude benchmark price gaining 0.3% to US$84.17 a barrel.

While energy stocks are falling today in sympathy with the 1% drop in the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) at the time of writing, the sector is regarded as one of the best places to invest on the market as not even the US-China trade war can sink the price of oil even as other commodities have taken a battering.

But the bullish outlook for oil couldn’t save Woodside Petroleum Limited (ASX: WPL) and Senex Energy Ltd (ASX: SXY) from a downgrade by JP Morgan as the broker believes this is the time to be taking profit.

The cut in JP Morgan’s recommendation comes even as the broker significantly increases its oil forecast and upgrades earnings estimates for every stock in the sector.

“Our earnings forecasts are now significantly above the market. We do expect consensus to catch up with our forecasts to reflect the increase in oil prices, we believe the sector looks fully valued on an average price to net present value (P/NPV) multiple of 1.01x, or 0.82x at spot,” said the broker.

The problem with Woodside and Senex is that these stocks are more than fully valued after our largest oil stock added more than a third in value while Senex rallied 60% over the past year.

Their share prices are above JP Morgan’s price targets of $37.00 and 47 cents a share, respectively.

While just about all other oil-exposed stocks are rated a “neutral” by the broker, there are two that are still worth buying.

The first is Origin Energy Ltd (ASX: ORG), which is JP Morgan’s pick of the sector. It believes that all parts of Origin’s business are contributing to an improving balance sheet while the high oil price will boost cashflow from its Asia Pacific LNG joint-venture.

The other stock that’s worth buying is oil services group Worleyparsons Limited (ASX: WOR). While the company isn’t directly exposed to oil prices, it’s a great way to ride the boom in the commodity as demand for its services will stay strong as oil and gas producers ramp up production to capitalise on high crude prices.

Worleyparsons is like the guy selling shovels during a mining boom.

JP Morgan has a price target of $9.25 a share on Origin and a target of $22.50 per share on Worleyparsons.

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