ASX 200 shares have had a jittery start to the year as a number of macroeconomic crosscurrents begin to meet in 2022. The benchmark S&P/ASX 200 Index (ASX: XJO) has fallen more than 3% since January 1 and some sectors have been hit worse than others.
Not the energy sector, however. ASX energy shares are still partying in 2022, yet to feel any sort of hangover.
The S&P/ASX 200 Energy index (XEJ) has climbed 12% this year to date, holding gains of roughly 6% over the previous 12 months.
That's a much better result than the high-beta technology sector has recorded. The S&P/ASX All Technology Index (XTX) has now plunged more than 16% for the year.
With this outsized performance, we check in with two ASX energy giants in AGL Energy Ltd (ASX: AGL) and Origin Energy Ltd (ASX: ORG) to see how they are faring in 2022 so far.
Both are well into the green since trading began this year – AGL is up 20%, whereas Origin has spiked just over 15% since January 4.
But which is the better choice for investors right now, or into the future? Here's what the team at JP Morgan had to say in its outlook on the Australian utilities sector.
Origin or AGL – what to do, who to choose?
JP Morgan is neutral on Origin even though its December 2021 quarterly production update "outperformed expectations", according to a recent note.
The broker notes that the global rally in energy commodity prices continued throughout 2021, "driving a 30% increase in Origin's realised [liquified natural gas] LNG prices to A$11.80/mmBtu".
However, analysts at the firm also pointed out that Origin's realised LNG prices were "noticeably below peers". It believes the variance stems from a lower level of cargoes sold on the spot, versus the company's competitors.
Not only that, but energy markets continue to face a shake-up amid more competition from renewables. As well, an unusual summer cold streak has meant spot energy prices had fallen 15% since late last year to $58/MWh at the time of the broker's release.
Electricity demand also remains 4% below pre-COVID times, "weighing on electricity prices which have been the cause of earnings downgrades for the company", according to the broker.
Even still, JP Morgan had thought increased commodity prices would be a positive catalyst for Origin's share price. But Origin's management guidance "implies Energy Markets' contribution will be the lowest in FY2022 in more than a decade", striking a downbeat tone to Origin's outlook.
"With no discernable catalysts for price improvement and with the stock close to our revised valuation, we remain Neutral," the broker says, valuing the company at $6.05 per share in the process.
What about AGL?
With AGL on the other hand, JP Morgan is overweight and sees the company in a new light following its assessment of its proposed demerged businesses.
The broker makes several observations in a recent note, urging clients to consider buying AGL in the process.
Analysts noted that "AGL no longer trades at less than the value of the retail business alone, which may mean the opportunity for corporate appeal ahead of the demerger has passed".
It also points out that the newly formed Accel Energy is now a "far more palatable entity" with an estimated net present value (NPV) of A$2.2 billion. That's not too far off AGL's current market capitalisation of $4.8 billion.
The broker also sees the opportunity for energy spot prices to jump further, which could lead to guidance upgrades from management.
"Notwithstanding reduced corporate appeal, we remain positive on AGL given much better electricity prices and compelling value," analyst Mark Busuttil remarked, smacking an $8.70 price target on the energy giant.
"While we remain concerned over the proposed demerger, [AGL's] stock price is now below our estimated value for the retail business."
Head to head though, what's the picture?
When it comes to estimates, JP Morgan reckons Origin will post earnings 8% below consensus whereas it tips AGL to beat consensus by 2%.
AGL's main drag is "corporate appeal with interest in energy retailing companies in Australia", according to the broker. However, it expects "increasing Brent and LNG spot prices to support higher free cash flow generation and strong cash distributions from APLNG" in Origin's case.
Not only that, but the broker values AGL at the deepest discount to the consensus price target versus its ASX energy peers. It values AGL 13% below the consensus price target provided by Bloomberg Intelligence, but notes this "is skewed due to two outliers".
Origin on the other hand is valued on par with the consensus price target by the broker, in line with its neutral view.
Hence, from this rudimentary analysis, it's clear that JP Morgan prefers AGL over Origin right now and is particularly bullish on the former.
However, if you're wondering what JP Morgan's favourite pick in the entire space is, it is Santos Ltd (ASX: STO) in the large cap space and Cooper Energy Ltd (ASX: COE) followed by Beach Energy Ltd (ASX: BPT) and Carnarvon Energy Ltd (ASX: CVN) respectively.
