Oil prices are soaring: The state of play for ASX 200 energy stocks

Oil prices have climbed to four-month highs on lower crude exports from the Middle East, signs of stronger demand in China and potential supply disruptions following Ukrainian attacks on Russian refineries.

WTI crude is on a five-day winning streak, up 5.9% to US$87.20 per barrel since Tuesday, 12 March. This marks the highest close since 30 October 2023.

But local energy stocks including Woodside Energy Group (ASX: WDS), Beach Energy (ASX: BPT) and Karoon Energy (ASX: KAR) have struggled to keep pace with oil's gains. We'll explore some of the challenges facing local energy stocks below.

WTI crude (Blue) vs. Beach Energy (Green), Woodside Energy Group (Red) and Karoon Energy (Orange) year-to-date performance, adjusted for dividends (Source: TradingView)

Oil Headlines At a Glance

Before we dive in – Here's a headline dump for all things oil.

• 20 Mar – Oil to trade at US$85-90 next quarter even without OPEC+ cuts (Bloomberg)

• 19 Mar – China set for record Russian oil imports in March (Bloomberg)

• 19 Mar – Oil prices inch higher amid attacks on Russian energy facilities (Reuters)

• 14 Mar – Oil prices climb as revised IEA outlook signals tighter market (Reuters)

• 13 Mar – Oil prices up 3% to 4-month high on US crude stock drop (Reuters)

Woodside: Plenty of Uncertainties

Woodside Energy Group has experienced a ~25% drawdown from August 2023 highs amid softening LNG prices, oil production risks and uncertainties with the company's Climate Transition Action Plan (CTAP).

Goldman Sachs retained a NEUTRAL rating on the stock with a $31.30 target price as of 28 February 2024, citing a number of risks including:

• Relatively full valuation: "Trading at ~0.9x NAV, with 55% of growth projects comprising our NAV we see higher risk of schedule delays and capex increases eroding upside to our valuation."

• Limited near term production growth to offset gas price weakness: "We expect production to remain relatively flat over 2024-2026 as Mad Dog 2 and Sangomar oil ramp up offsets existing decline at the North West Shelf and Bass Strait, leaving earnings largely exposed to softening LNG prices."

• Oil production ramp-up uncertainty: "As Mad Dog 2 continues to ramp-up and Sangomar is brought online mid-year, ramp-up phasing, peak production rates, and initial decline rates will remain a focus over 2024 which could present downside risk to our estimates."

Woodside 12-month price chart (Source: Market Index)

Beach Energy: Mixed Catalysts

Beach Energy's half-year FY24 result (announced 12 Feb) missed analyst expectations across most key metrics, attributed to higher costs, tariffs and depreciation/amortisation.

• Production down 11% to 8.8MMboe (millions of barrels of oil equivalent), in-line with consensus

• Underlying EBITDA down 1% to $488 million or 8% below $532 million consensus

• Underlying NPAT down 10% to $173 million or 23% below $225 million consensus

While the earnings underwhelmed, the company's new Managing Director Brett Woods told the market what it wanted to hear. In just two weeks on the job, he has:

• Launched a strategic review into costs and capital discipline

• Deep dive review into Waitsia Stage 2 and confirmed its develop as on time and on budget

• Paused Western Flank exploration drilling to assess recent drilling results

• In the earnings Q&A, he said he was keen to pursue value-accretive production growth in the Perth Basin but wanted to instil a higher degree of cost discipline across the business

Beach Energy 12-month price chart (Source: Market Index)

Karoon Energy: Working Through Who Dat

Karoon Energy raised $480 million at $2.05 per new share (14.6% discount to pre-raise close) in November 2023 to acquire a 30% interest in the Who Dat and Dome Patrol oil and gas fields in the US.

The raise increased outstanding shares on issue by approximately 41%, offset by factors such as:

• Builds scale with 57-63% increase in 2024 production

• Raises EBITDA by approximately 44%

• A 75% lift in 2P reserves

• Diversifies Karoon both geographically and by asset

"Since the US acquisition, Karoon has suffered lower oil prices and temporary Brazil production issues. Who Dat performing strongly, and should boost in 1H24 with new wells online. The wild-card is the unpriced exploration & development upside around Who Dat (US) and Neon (Brazil)," Macquarie analysts said in a note earlier this year.

Market Index's broker consensus data currently has a $2.57 target price. Citi stands out as the most bullish broker, with a $3.00 target price.

"Operating cash flow was a good beat versus consensus and highlights the cash generation of the business which we think has been misunderstood. At a $60 oil price for CY25, we estimate that over the next 24 months KAR could earn ~40% of its market cap in FCF," the analysts said in a note dated 28 February.

Karoon 12-month price chart (Source: Market Index)

Putting It All Together

The three oil majors above are carrying plenty of baggage from hefty CAPEX cycles to fulfilling climate transition commitments and integrating new assets, among other challenges. These factors collectively weigh on their current share price performance. However, should oil prices continue to push higher, energy stocks are likely to follow suit.