Oil may have passed “peak pain” but Citigroup thinks this may be as good as it gets for the sector as it downgraded two ASX energy stocks.
This could be a blow to confidence in ASX exposed oil stocks as the group took the brunt of the COVID-19 market meltdown.
Just as investors are thinking that the sector has hit a bottom and is on the road to recovery, Citigroup poured cold water on shareholders.
Near-term thrill vs. longer-term chill
This sombre view comes even as the broker upgraded its nearer term forecast for the commodity.
“We upgrade CY21 Brent oil to US$59/bbl [barrel] from US$52/bbl, based on deeper OPEC+ cuts/compliance and Saudi Arabia’s additional (voluntary) 1mbpd cut,” said Citi. “We see oil peaking at US$61/bbl in 1Q22.”
More significantly for ASX energy stocks, the broker also upgraded its price predictions for liquified natural gas (LNG). These stocks are more leveraged to LNG prices than oil prices.
Citi expects the key LNG price benchmark, called JKM, to hit US$9.6/mmBtu [million British thermal units) this calendar year from US$4.9/mmBtu.
Looking fairly priced
However, on a longer-term basis, the recent bounce in ASX energy stocks puts the sector at fair value, according to Citi.
“Interestingly, implied oil prices for pure E&Ps are tightly bunched in the mid-$50s, consistent with both Citi’s long term price and spot, the first time we have observed such a tight spread in >10 years,” added the broker.
“Against our risked DCF approach to valuation, we would argue that Energy looks reasonably priced at these levels.”
ASX energy stocks that copped a downgrade
The bounce in the Santos Ltd (ASX: STO) share price and Beach Energy Ltd (ASX: BPT) share price, together with the lack of catalysts, have prompted Citi to downgrade both stocks to “neutral” from “buy”.
This could explain why the STO share price and BPT share price are underperforming the Energy sector this morning.
The former slumped 2.4% to $7.33 and the latter crashed 3.8% to $1.89. In comparison, the sector lost 0.9%.
ASX oil stocks to buy now
The only caveat to this downbeat view is mergers and acquisitions (M&As). Cashed up bidders are likely to be on the prowl in this environment.
But M&A excitement aside, this doesn’t mean there aren’t good deals to be had. Citi is recommending investors buy the Senex Energy Ltd (ASX: SXY) share price for its 8% free cashflow yield that’s expected in FY22.
The broker also like the Origin Energy Ltd (ASX: ORG) share price among the large caps for its exposure to the rebound in electricity prices.
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Motley Fool contributor Brendon Lau owns shares of Beach Energy Limited and Santos Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. 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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