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Is Enough Supply In The Tanks For Energy Stocks In 2023?

  • The energy benchmark ETF NYSE:XLE (XLE) is up over 60% this year.
  • Australian energy stocks have been on a similar run.
  • Woodside Energy Group ASX: WDS (WDS) Up 64% Year-To-Date, Is There Any Room For Australian Energy Stocks?

year in the books

WDS is up over 60% year-to-date. Energy stocks in general have had a remarkable run in 2022. Tight supply chains and low stocks ahead of the lockdown exit meant demand was a step ahead of supply.

As a result, commodity prices remained high throughout the calendar year, including coal, natural gas and oil. In early June and March, international benchmark Brent crude oil briefly changed hands north of USD 130/BBL, a level not seen since the global financial crisis (GFC).

A quick change of course and the start of sales from the US government’s special reserve, combined with a sharp rise in production levels from private US oil companies, quickly dampened oil prices. They are down over 30% from the June highs.

compared to historical value

Woodside Energy Group (WDS), Santos Ltd ASX:STO (STO) and Beach Energy Ltd ASX:BPT (BPT) are three of the largest oil and gas producers in Australia.

Its shares currently trade at multiples of between 7.5 and 10 times reported earnings. That’s on the low end of historical valuations, but it does bring some serious caveats.

The International Energy Agency (IEA) projects that oil demand growth will increase to 4% overall over the next eight years and then decline. That equates to extremely modest international growth of 0.5% per year, leaving little room for existing and new producers to find new direct customers.

With fewer and fewer opportunities to create intangibles for customer relationships as buyers dwindle, future barrel energy producers will be forced to switch to general liquidity pools and hope for the best market price, thereby cutting future margins.

Comparison to international value

The world’s largest energy company, Exxon Mobil Corporation NYSE:XOM (XOM) is currently trading at multiples of 9 times reported earnings (PE ratio).

This is cheaper than some tech stocks, which often trade at much higher than 20 times earnings. There’s a key difference, however, as tech companies tend to grow much faster than oil companies. Without the growth buffer, future estimated earnings aren’t worth that much. Today, the median for the S&P 500 is around 20.

As the IEA is currently forecasting that in a few years and less than the nine XOM currently traded for, the market of XOM will actually shrink.

Additionally, the XOM multiple of nine is slightly higher than the 6s and 7s it traded for between 2010 and 2014. Hence, there has been stronger selling for XOM stocks in the recent past.

outlook

Energy stocks have had an incredible run in 2022. Could the party be over soon? International oil prices are down over 30% since June, but energy stocks are up on balance over the same period.

Certainly there have been windows of better value for energy stocks, and despite concerns about Russian supply crowding, actual shortages have yet to materialize.

US supply growth continues as the world debates a possible impending recession and the IEA is forecasting demand to slow as we rely more on renewable energy.

It might be worth taking a wait-and-see attitude now when investing in energy stocks.

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