AGL Energy Ltd (ASX: AGL) and Origin Energy Ltd (ASX: ORG) shares are a popular option for investors looking for exposure to the energy sector.
But should investors be buying these ASX energy shares today?
According to analysts at Ord Minnett, the answer is no.
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What is the broker saying?
This month, Ord Minnett has been taking a fresh look at AGL and Origin Energy and has come away more cautious on both companies.
The broker believes electricity market transition dynamics are evolving less favourably than previously expected.
In particular, it is concerned that battery capacity in the National Electricity Market is being deployed much faster than required at a time when coal-fired generation is not closing quickly enough. It explains:
Ord Minnett sees increasing downside risk to AGL Energy and Origin Energy as electricity market transition dynamics evolve less favourably than had been anticipated. Our central thesis is that battery capacity in the National Electricity Market (NEM) is being deployed materially faster than required in the absence of corresponding coal-fired generation retirements.
Battery-capacity additions are now running at close to double the pace implied by system requirements to 2030, meaning anticipated needs are likely to be met as early as 2027. Many of the coal-fired power station closures assumed in long term planning, however, have yet to occur. This timing mismatch has materially reduced volatility across the electricity market, and is evident in lower gas demand from power generation, a sharp fall in capacity contract prices, weaker frequency control ancillary services revenue, and narrower intraday price spreads.
This has led the broker to downgrade both companies.
AGL and Origin shares downgraded
AGL shares have been cut to a hold rating from buy, with its price target reduced to $11.75 from $13.25.
The broker notes that AGL supplies energy generated from coal, gas-fired, wind, hydro, solar and grid-scale batteries. It also has natural gas storage and other firming and storage technology.
These flexible assets were expected to become increasingly valuable as the energy transition progressed. However, Ord Minnett now believes the outlook for battery earnings is weaker than previously assumed.
The broker is even more cautious on Origin Energy.
Ord Minnett has downgraded Origin shares to a lighten rating from hold and reduced its price target to $10.40 from $11.00.
Commenting on its earnings downgrades, the broker said:
We now forecast battery operating earnings (EBITDA) of around $150 million per annum for AGL Energy in FY28 and FY29, well below prior expectations for EBITDA of $250–300 million. For Origin Energy, we estimate battery earnings contributions for FY27 and FY28 of $230–270 million before lease cash costs of approximately $120 million per annum.
