Best 4 ASX energy stocks to watch in May

As oil market volatility persists, we examine J.P. Morgan’s preferred energy stocks from its Australian coverage universe.

Commodities chaos

Oil markets collapsed during the back-half of March, as storage issues, Covid-19 induced demand destruction and quirks with WTI’s May Nymex futures contract all came to a head.

At its worst, WTI’s May contract went negative. Brent futures also plunged, though not quite as much. And off the back of this carnage reports have begun to trickle out that investors large and small have been heavily impacted.

Things have improved, but not markedly.

At the time of writing oil markets continue to trade violently: on Monday, 27 April, as of 2:06 AM (EDT) the WTI June contract was down US$1.93, or 11.39%, to US$15.01 a barrel. By comparison, Brent's June contract was down US$0.84, or 3.94%, to US$20.60 a barrel.

Top 4 ASX energy stocks to watch in May

Besides the arcane game of oil futures trading, gas and oil equities have also faced heavy selling pressure from investors in recent months, as individuals look to de-risk at whatever the cost.

That sell-off, according to some, has created a distinct value opportunity, with J.P. Morgan analysts arguing that many key ASX-listed energy large and small caps are now trading below their net present value (NPV). This, says the investment bank, may represent a significant value opportunity for risk tolerant investors.

As it stands, J.P. Morgan noted that within its coverage universe, its preferred energy large caps are Santos (STO) and Beach Energy (BPT); while amongst the small caps, the firm’s analysts favour Senex Energy (SXY) and Cooper Energy (COE).

Below we breakdown J.P. Morgan’s (JP) price targets on each of those stocks as well as the implied potential upside:

Company

Share price

Price Target (JP)

Implied upside

Santos

$4.330

$6.40

47.8%

Beach Energy

$1.325

$2.20

66.03%

Senex Energy

$0.200

$0.34

70%

Cooper Energy

$ 0.395

$0.60

51.89

There is a caveat to this bullishness however, with the investment bank warning that 'with economic conditions likely to worsen, returns could be a long-time coming.'

Santos share price: good exposure levels

Overall, Santos stands out as J.P. Morgan’s preferred large cap energy pick, with analysts noting that its 'exposure to domestic markets reduces the leverage to benchmark oil prices. Notwithstanding these factors, Santos remains one of the cheapest of the larger caps under our coverage.'

In the last month the Santos share price has risen ~28%.

Beach Energy share price: balance sheet strength

From the analyst view point, Beach not only has the strongest balance sheet of all the large caps in J.P.’s coverage universe, but it also has a number of promising growth opportunities on the horizon.

Here it was noted that Beach, 'continues to invest for production growth, and we believe there are further growth opportunities. With a strong balance sheet and significant potential upside to our NPV, we remain Overweight.'

In the last month the Beach Energy share price has risen ~14%.

Senex Energy share price: strong momentum

The Senex Energy share price as performed well in the last month – rising approximately 25% in that period.

All up, the investment bank contends that Senex is progressing well with its growth projects, such as the Western Surat Gas Project and Project Atlas, which, when completed will significantly boost the firm's production capacity. The catch here is, because the majority of J.P.'s valuation is derived from these growth projects 'the key risk to Senex lies in project execution.'

Cooper Energy share price: value and stability

J.P. Morgan centrally favours Cooper Energy not only on valuation grounds but due to the firm’s stable outlook as a result of its fixed price contracts.

'Cooper Energy should be relatively immune to the recent changes in benchmark commodity prices largely because its domestic gas is sold at fixed price contracts,' it was noted.

Though the investment bank may be bullish on Cooper’s prospects, investors seem less enthusiastic. In the last month the small cap has seen its share price fall ~8%.

How to trade oil markets: long and short

What do you make of the current situation: is J.P. Morgan being overly optimistic or is their analysis on the right track? Whatever your opinion, you can trade WTI spot and futures, as well as any of the ASX-listed energy stocks we have discussed today – long or short – through IG’s world class trading platform now.

For example, to buy (long) or sell (short) Santos using CFDs, follow these steps:

  • Create an IG trading account or log in to your existing account
  • Enter ‘Santos’ or ‘STO’ in the search bar and select it
  • Choose your position size
  • Click on ‘buy’ or ‘sell’ in the deal ticket
  • Confirm the trade

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The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

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