How have ASX energy shares performed during the August 2021 earnings season?

FY21 has been a mixed bag for ASX energy shares as the sector restructures and positions itself for a transition to cleaner energy sources.

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ASX energy shares play a vital role in powering the economy. These companies are involved in producing and supplying energy, developing oil and gas reserves, and refining and fuel production.

Woodside Petroleum Limited (ASX: WPL), engaged in petroleum exploration and production, is the ASX’s largest energy stock. Santos Ltd (ASX: STO), an oil and gas producer, and AGL Energy Limited (ASX: AGL), which produces and sells electricity, are also major players.

Results for ASX energy shares were mixed in the August earnings season — the sector is currently in a state of flux, with several mergers and demergers planned.

As society moves toward cleaner energy sources, industry participants are restructuring and refining operations as they position their businesses for the future. 

How have ASX energy shares performed against the market?

Shares in the energy sector have underperformed the broader market in 2021. The AGL share price has declined steadily, falling almost 50% over the course of the year. By contrast, the All Ordinaries Index (ASX: XAO) has gained more than 10% year to date.

AGL’s share price fall means the company was removed from the S&P/ASX 50 (ASX: XFL) in the most recent quarterly rebalance. Share in Woodside Petroleum have also dropped this year, currently down more than 16% year to date, while the Santos share price is around 6% lower for the year. 

Who are the winners this earnings season? 

Santos was a winner this earning season, reporting record half-year production and sales volumes.

Production increased 23% while sales volumes were up 15%. Product sales revenue reached US$2,040 million, providing a free cash flow of US$572 million.

Net profit was US$354 million, up from a loss of US$289 million in 2020. This allowed for the payment of a fully franked dividend of US5.5 cents per share, 162% higher than the previous interim dividend. 

Santos is progressing a planned merger with Oil Search Ltd (ASX: OSH), under which Santos will acquire all shares in Oil Search for consideration of new Santos shares. Oil Search shareholders are expected to hold approximately 38.5% of the merged group, with Santos shareholders owning approximately 61.5%.

The merged entity is expected to have a pro forma market capitalisation of A$21 billion, positioning it among the 20 largest global oil and gas companies. 

Improved oil and gas prices in 1H 2021 boosted Woodside Petroleum’s earnings before interest, tax, depreciation and amortisation (EBITDA), which increased to $1,496 million from $974 million in 1H2020.

The company reported that sales revenue was boosted by a recovery in LNG and oil demand towards pe-pandemic levels. Underlying profit increased by 17% to $354 million for the half-year.

The company declared an interim dividend of US 30 cents per share, representing a payout ratio of approximately 80% of underlying profit after tax. The result reflected a strong rebound in market conditions following the uncertainty brought on by COVID-19 in 2020. 

The day before the release of its half-year results, Woodside announced plans to enter a merger with BHP Group Ltd (ASX: BHP). The plan is for the companies to combine their respective oil and gas portfolios by an all-stock merger. This will create a global top 10 independent energy company by production.

BHP’s oil and gas business would merge with Woodside, and Woodside would issue new shares to BHP shareholders. The expanded Woodside would be owned 52% by existing Woodside shareholders and 48% by existing BHP shareholders. 

And the losers? 

AGL’s earnings (EBITDA) fell 18% in FY21 to $1,666 million, reflecting a challenging year for the energy company.

Results were impacted by lower wholesale electricity prices, reduced electricity generation output at peak periods, and the roll off of legacy supply contracts.  Underlying profit after tax fell 34% to $537 million, reflecting the impact of increasing generation supply and lower demand arising from the pandemic and milder weather.

A statutory loss of $2,058 million was reported, including $2,929 million of impairment losses previously announced. Despite challenges in the wholesale market, AGL continues to consolidate its position as Australia’s largest multi-product energy retail with solid organic and inorganic growth. The company added 254,000 services to customers in FY21, with customer churn flat across the year. 

AGL has confirmed it intends to undertake a demerger to create two energy businesses with separate listings on the ASX. AGL Energy Limited is to become Accel Energy Limited, a baseload power producer focused on redeveloping its sites as low-carbon industrial energy hubs.

AGL Australia Limited, an energy retailer backed by flexible energy trading, storage and supply, will be demerged. The demerger is intended to protect value and provide greater strategic focus for both entities. 

What is the outlook for ASX energy shares?

AGL has provided guidance for underlying EBITDA of $1,200 million to $1,400 million and net profit after tax of $220 million to $340 million in FY22. The company expects to deliver a $150 million reduction in operating costs (excluding depreciation and amortisation) in FY22 compared to FY20.

AGL has expressed cautious optimism regarding its outlook, noting it is well-positioned to benefit from any sustained recovery in wholesale electricity prices. Plans are progressing to implement the demerger in the fourth quarter of FY22. 

Thanks to improved oil prices, Santos says it is on track to deliver free cash flow of more than $1.1 billion in 2021.

Santos and Oil Search are expected to sign a binding merger agreement in the coming weeks, with the due diligence period set to expire on 13 September 2021. The merger is expected to create a regional champion with a diversified portfolio of long-life, low-cost oil and gas assets. Substantial potential synergies are expected to be unlocked. 

The Woodside BHP merger is expected to take place during the second quarter of the 2022 calendar year.

The expanded Woodside will boast a high margin oil portfolio and long life LNG assets with resilient, high margin operating cash flows. These assets are expected to generate attractive returns for the next decade but will need to be positioned within society’s transition to clean energy. 

Motley Fool contributor Katherine O'Brien has no position in any of the stocks mentioned. 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.

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