Of all the sectors on the S&P/ASX 200 Index (ASX: XJO), few have disappointed investors more in 2020 than ASX energy shares.
2020 has delivered its fair share of challenges to be sure (as we all know), but the energy sector has not been well-placed to deal with them.
You only need to compare the performance of this sector against, say, tech shares, or consumer staples, to see this. In fact, out of all the companies in this sector, only one is actually above where it started the year, as you can see below:
|ASX energy share||YTD share price gain (as of 22 December)||Market capitalisation|
|Oil Search Ltd (ASX: OSH)||(50.78%)||$7.23 billion|
|Origin Energy Ltd (ASX: ORG)||(44.33%)||$8.3 billion|
|Whitehaven Coal Ltd (ASX: WHC)||(37.16%)||$1.67 billion|
|Woodside Petroleum Ltd (ASX: WPL)||(35.25%)||$21.48 billion|
|New Hope Corporation Limited (ASX: NHC)||(33.09%)||$1.15 billion|
|Beach Energy Ltd (ASX: BPT)||(28.97%)||$4.08 billion|
|Worley Ltd (ASX: WOR)||(26.99%)||$5.85 billion|
|Santos Ltd (ASX: STO)||(25.67%)||$12.73 billion|
|Ampol Ltd (ASX: ALD)||(18.14%)||$6.95 billion|
|Viva Energy Group Ltd (ASX: VEA)||(15.13%)||$3.11 billion|
|Washington H. Soul Pattinson & Co Ltd (ASX: SOL)||42.33%||$7.26 billion|
All of these shares are in the ASX 200 Index, save for New Hope.
But why such a terrible year? We all need energy at the end of the day. It is an essential input into all other forms of economic activity. Even futuristic tech companies need energy to function.
Well, it comes down to how this sector functions. See, ‘energy’ usually means oil, crude oil to be specific. Also included is gas and coal of course, but gas, coal and oil are very closely interrelated when it comes to pricing dynamics and profitability. So let’s see what’s happened in the oil space this year.
Energy has a shocker of a year
Such a sudden, massive economic change played havoc with oil prices. That’s what happens when all of a sudden, people around the world stop flying on aeroplanes, going on cruises and driving to work.
By April, Brent crude prices had crashed to multi-year lows of under US$20 a barrel. At the same time, futures contracts for another type of crude oil, West Texas Intermediate (WTI) actually went negative for the first time in history. That means that back in April, investors were actually paying people to buy and store oil.
We saw this trend play out across all energy commodities, not just crude oil. At the start of the year, natural gas was priced at approximately US$2.19 per MMBtu. That had fallen to US$1.55 by April. Similarly, thermal coal was asking around US$45 a tonne at the start of the year. That was down to US$34 by April.
All of these wild price fluctuations would not have been welcome by the companies in the ASX energy sector. Most of these companies are price takers, meaning they have to accept the international market price for the commodities they extract. The only thing they can really control is their own cost of production. So an oil company that had a cost of extracting one barrel of crude of US$40 would have been comfortably profitable in January, only to be bleeding money by April.
At the time of writing, commodity prices have recovered and stabilised somewhat. But even today, Brent crude is still only trading at US$50.91 (at the time of writing). That’s a long way from the US$66 it was asking at the start of the year. And those margins make a big difference to the profitability of ASX energy shares for the reasons we’ve just discussed.
Another headwind ASX energy shares have been facing in 2020 is a rising Australian dollar. Since almost all commodities are priced in US dollars, a rising Aussie hurts these companies’ profitability. It means that they have to swap more Aussie dollars for each US dollar when they sell their commodities on international markets.
And right now, the Aussie is pretty close to a 3-year high against the greenback right now. That would have offset much of the recent gains in oil, coal and gas prices – another headache these companies have had to deal with.
It’s not all bad for ASX energy shares
Saying all of this, it’s important to note that, while these ASX energy shares are mostly still down year to date, many have had spectacular recoveries since finding their bottom. An occurrence that might have been taken advantage of by a few savvy investors.
For example, whilst Oil Search remains down more than 50% year to date, it is also up more than 90% since 23 March. Likewise, Beach shares are up more than 88% over the same period.
It is worth mentioning the elephant in the room before we go. Washington H. Soul Pattinson & Co (‘Soul Patts’ for short) has had a sector-defying 44% gain year to date and is currently trading pretty close to its all-time high.
But before you get carried away with this ‘energy wunderkind’, note that that Soul Patts is barely an energy company. It does hold a stake in New Hope Corporation. But in reality, Soul Patts is a massive conglomerate, with large stakes in a range of ASX shares. These include Brickworks Ltd (ASX: BKW), TPG Telecom Ltd (ASX: TPG) and Australian Pharmaceutical Industries Ltd (ASX: API).
So if you’re wondering why this company is an outlier, it’s likely because Soul Patts has little relative exposure to the energy sector compared to its peers.
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Motley Fool contributor Sebastian Bowen owns shares of Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Brickworks and Washington H. Soul Pattinson and Company Limited. 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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