Australian energy stocks have been a mixed bag in 2024, following the outcome of the US election and a volatile commodity market this year.
And there is both light and darkness in this tunnel, with brokers rating one company highly, and saying to avoid one energy stock all together.
Two stocks in the spotlight are Santos Ltd (ASX: STO) and AGL Energy Ltd (ASX: AGL), but with differing outllooks.
Let's see what the experts have to say on each.
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One Australian energy stock rated a buy
Santos is garnering attention from brokers as a compelling option in the Australian energy market.
Analysts at Ord Minnett have a buy rating on Santos shares. They cite a robust outlook for free cash flow as key projects like Pikka and Barossa LNG ramp up production.
The broker estimates Santos will deliver a free cash flow yield of 20%, offering the potential for increased dividends or share buybacks.
Meanwhile, Bell Potter considers Santos a top-value pick because it can generate strong earnings growth without requiring higher commodity prices.
The broker also reckons the market might be overlooking the long-term demand for oil and liquefied natural gas (LNG).
Ord Minnett has a price target of $8.50 on the Australian energy stock, implying a 27% upside potential from the time of writing.
And one to avoid
AGL Energy shares, on the other hand, have drifted sideways these past two months. The Australian energy stock has been grappling with a downgrade and sell rating from Barrenjoey in late October.
The broker slashed its price target for AGL by nearly 19%, from $13.80 to $11.20, and anticipates a decline in earnings over the next few years.
One of the primary issues facing AGL is the expiration of its current coal and gas contracts, which, according to Barrenjoey, is expected to weigh heavily on the company's margins.
And while AGL is making significant investments in renewable energy and battery storage, these projects may not offset the earnings gap in the near term.
Barrenjoey says the company's plan to invest $8 to $10 billion over the next decade to "sustain earnings at FY24 levels" underscores the scale of the challenge ahead.
Foolish takeout
These two energy stocks tell two differing stories. Analysts say Santos stands out as an option for investors seeking exposure to Australian energy stocks, thanks to its free cash flow potential and disciplined capital allocation.
If Barrenjoey is correct, AGL, on the other hand, may require more patience. While its focus on renewable energy and battery storage fits the trend, it's an execution story now.
AGL is up 21% in the past year, whereas Santos is down 1%.
