The 5 large cap ASX energy shares in the S&P/ASX 200 Index (INDEXASX: XJO) have jumped by up to 8% so far this week. This is largely on the back of the improvement in the West Texas Intermediate oil price up to US$25. However, regional LNG prices remain at record low levels. Given recent results, the low oil price shock seems to have been a panacea for driving inefficiencies out of the large cap Australian energy companies.
Origin Energy Ltd (ASX: ORG) has led the blue-chip energy shares this week with a rise in share price of 8.16%. The company has agreed to acquire a 20% stake in Octopus Energy in the UK for $507 million. This includes exclusive Australian access to the Octopus software Kraken.
Origin reports that using the software will extend its competitive cost position, with targeted cost savings of $70–80 million by FY22 and $100–150 million by FY24. The move also provides Origin with a potential pivot to diverse regulatory markets in the UK and Europe, with potential UK market deregulation by 2023.
Strong results and reduced costs
The Woodside Petroleum Limited (ASX: WPL) share price is up by 8.7% this week, swept up in market rises. While there is some relation between the oil price and regional LNG prices, it is far from a perfect relationship. Even though the WTI Crude spot price rose, the LNG price remains near record lows.
In its March quarterly report, Woodside reported a rise in production by 12% and a reduction in 2020 total expenditure by an impressive 50%. This energy stock is well positioned to deal with a low oil price world. Its strong balance sheet also gives it the potential for opportunistic acquisitions should they arise.
Strong balance sheet
The Santos Ltd (ASX: STO) share price has risen by 8.7% since Monday. Santos’ CEO Kevin Gallagher announced at a conference on 5 May that 70% of the miner’s 2020 forecast production volumes were secure. Forward gas production was secure in fixed price gas contracts and oil was hedged at an average floor price of US$39/bbl. Gallagher also revealed that the company had ample liquidity. This includes $1.15 billion in cash and $1.9 billion in undrawn debt facilities. The company is targeting a free cash break even price of $25/bbl.
For me, Santos looks like the best performing energy stock.
A rising tide for energy shares
The Oil Search Limited (ASX: OSH) share price, which has risen by 6.5% so far this week, has been carried with the rising market. In addition the Caltex Australia Limited (ASX: CTX) share price has risen by 5.42%. Of these 2 shares, Oil Search is clearly still in the fight of its life, although its management have acquitted themselves well so far. Tough decisions have been taken on headcount, capital expansions, sustaining capital and many other areas.
The market seems to be comfortable with the blue-chip energy shares as they adapt to the new normal. However the spread between the May and June contracts (the front month and second month) is presently the widest in history. As traders roll over contracts in May, it is likely we will see oil prices dip again.
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Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. 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 Scott Phillips.
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