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MoneyTalks: John So reckons these ASX energy stocks might just fly
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MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.
Today we hear from VP Capital co-founder and portfolio manager John So on ASX energy stocks.
What’s hot
Traditional upstream ASX energy stocks are back in favour according to So, as markets get jittery around economic uncertainty and the outlook for persistent inflation.
He said investors are also waiting to see what US Federal Reserve chairman Jerome Powell indicates about the country’s economy following its annual symposium in Jackson Hole, Wyoming this week.
“We expect Powell to give a bit of an indication about where things are at in terms of inflation, where the central banks see the trajectory of interest rates,” So said.
He said the market was due for a relief rally a month earlier, but may be more sensitive now to the downside and Hawkish remarks by the Fed from the Jackson Hole meeting could have a negative outcome.
“A lot of sectors have high beta in them and correlate with the market whether it’s tech stocks, healthcare or financials,” he said.
“If the market reacts negatively, all these sectors might be a tough spot.”
However, he said inflation is partly being driven by high energy costs as evidenced by many companies in the sector putting out strong annual results recently.
“The market in the past week or so has really taken a liking to these results and companies doubling, tripling or even increasing their profits by bigger multiples than that,” he said.
He said VP capital has taken positions in oil and coal, which have done well in the past week as markets start to pare back gains from a mid-year rally.
Top pics – ASX energy stocks
The former Guildford Coal counts the Blair Athol coal mine in central Queensland as its main asset. TER has assets both in Australia and South Africa.
Shares in TerraCom have risen more than 430% in the past year and ~12% in the past month to 85c. Directors Danny McCarthy, Graeme Campbell and Glen Lewis are still building positions and together they’ve shelled out more than $527,000 for more of the former.
So said TER is trading at an undemanding cashflow multiple of ~2x.
“In other words, if coal prices hold up you can get your money back in two years,” he said.
“That’s not to say the coal price will hold but it has already for a year and if it did so for another year, you’ve already got half of your capitalisation back.”
He said geopolitical instability and the war in Ukraine has been a major driver of elevated coal prices. He said the second driver will be the northern hemisphere entering into winter.
“We are seeing energy shortages in places like China, Germany, Japan, France in summer,” he said.
“China has already imposed curbs so you can imagine as the northern hemisphere heads into winter the situation will be more severe.
“I think energy and coal commodity prices will remain high all the way through to at least the end of winter in the northern hemisphere.”
In the oil space Karoon Energy is So’s pick. Karoon has oil production and exploration assets in Brazil.
“Oil prices have come off a little bit, different to coal, partly on a potential supply arrangement deal with Iran and concern about the Chinese economy slowing,” he said.
“My view on oil prices is generally that they won’t go much lower because there’s been an underinvestment for the past five years for various reasons and the China slowing down sentiment is a little overplayed.”
He believes in time China will take a different approach to handling Covid-19, which will see its economy rebound.
“Sometimes the market doesn’t look at the long-term and focuses on the next month or so, but I think the situation can reverse very quickly,” he said.
“China will reintegrate, get its supply chains and production lines moving, allow people back out and travellers back in which all point to a recovering Chinese economy, and that will stabalise oil demand.”
The Australian east coast gas supplier is So’s third choice in ASX energy stocks. The company’s share price is down ~13% year to date but has risen more than 2% in the past month to 23 cents/share.
“The share price hasn’t done as well as its energy peers in the sector and I think part of the reason is they’ve had production issues at their plants which haven’t been resolved, as well as an overhand from its recent capital raising,” he said.
In July COE announced it had completed a $244 million capital raise to buy APA’s Orbost gas processing plant.
“I think now that Cooper Energy is an integrated producer it is motivated to take a different approach, and will focus on long-term solutions that production increase and normalise to what was the targeted capacity,” So said.
“This means Cooper Energy will have excess gas on top of their 48 terajoule per day of production currently to sell into the spot market which is ~$14 gigajoule now on the east coast.
“This compares to $10 gigajoule which Cooper Energy received across all its gas sales in the June quarter, so I think it’s an interesting one to watch.”
He said even by COE’s typical conservative financial and production guidance, FY23 is looking strong.
“I’d also make the point Cooper Energy’s share price is where it was last year when gas prices were at almost half of today’s level,” he said.
“So, you’re picking up the company at the same price in an environment where operating margins are much higher and the gas market has become much tighter.”
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee and do not represent the views of Stockhead. Stockhead does not provide, endorse, or otherwise assume responsibility for any financial product advice contained in this article.</em
