Are ASX energy shares worth buying in this decarbonising world?

Investors are increasingly wary about investing in fossil fuel shares but Jarden thinks there are opportunities in the sector.

| More on:
ASX energy share price buy represented by man holding petrol pump line which is forming upward trending arrow

Image source: Getty Images

ASX energy shares could find it increasingly harder to attract investors as we become more environmentally conscious.

But this doesn’t mean there aren’t buying opportunities in the sector, according to Jarden.

The broker initiated coverage on ASX oil and gas shares during these complex times as the world tries to decarbonise.

Biggest risks factors from investing in ASX energy shares

“Our in-depth initiation report analyses the shifting fortunes of six oil & gas stocks as they navigate a pathway to growth amid rising investor concern about the role of fossil fuels in the future energy mix,” said Jarden.

“Key sector risks we see include cost and labour pressures, oil and LNG and increasing regulatory and investor expectations.”

Increasing investment and costs

Four of the biggest ASX energy shares plan to invest US$6 billion a year combined over the 2021-26 period, up from US$2.9 billion a year average over the past five years.

These shares are the Woodside Petroleum Limited (ASX: WPL) share price, the Oil Search Ltd (ASX: OSH) share price, the Santos Ltd (ASX: STO) share price and Beach Energy Ltd (ASX: BPT) share price.

Best large cap ASX energy shares to buy

“Our top pick amongst large caps is OSH as it looks to progress its Alaskan oil development this year,” said Jarden.

“A supportive oil price should assist OSH in selling a 15% stake in the Pikka project, secure project funding and move to FID in late-21/early-22.”

But the broker reckons that the Woodside share price and Santos share price are sells.

Why Woodside and Santos don’t cut it for Jarden

Jarden warned that Woodside’s Scarborough development capex could run higher than the market expects. It also thinks that it could be a challenge for Woodside to keep its BBB+ credit rating, although Woodside could divest assets to address this issue.

“STO has been the favourite of the energy sector over the past three years but in our view is trading at a significant premium to valuation,” added Jarden.

“Will this premium dissipate? The free cash flow story the market has liked so much is about to end as the company prepares to invest as much as US$8.5bn over the next five years.

“The sting in the oil price rally tail for STO is the potential for ~US$200m in oil hedging losses in 2021.”

Better buys among smaller ASX energy shares

There are more buying opportunities in the sector at the smaller end of the market. The broker rates the Beach Energy share price as “overweight” despite the company’s shock profit warning earlier this year.

Confidence will take time to rebuild, but Jarden believes the stock is oversold and has a 12-month price target of $1.50 a share.

However, the Senex Energy Ltd (ASX: SXY) share price is the broker’s top pick with a $4.10 price target. Although Jarden also rates the Cooper Energy Ltd. (ASX: COE) share price as a buy.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of May 24th 2021

Brendon Lau owns shares of Santos Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. 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.

More on Energy Shares