Energy: Stock picking and Rising Energy Prices

Under the Radar Report was correct to predict that the oil price would be stronger for longer. We’ve been generating good profits from the sector, including from Karoon Energy (KAR), which returned 117% in less than 12 months.

Now that the oil price has come back from its highs we take a look at the wider energy sector – oil &gas, nuclear, lithium, batteries, hydrogen – and the individual stocks that have the potential to be our next KAR.

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Making sense of the New Energy Complex

The growth of renewable energy, particularly solar and wind, and increasing commitments to climate targets has cut investment in oil, gas and coal projects, particularly by the major oil and gas producers. Just as this has happened, there has been sharp increases in demand for the fossil fuels causing rising prices.

This has been occurring even prior to Russia’s invasion of the Ukraine earlier this year! The action has added another dimension of volatility and uncertainty to energy markets, not to mention a sharp increase in oil and gas prices.

One side-effect has been a renewed focus on nuclear energy, as technology in that industry advances on safety and efficiency, as modular forms become increasingly sought after.

Concurrently, lithium is providing the means to store green energy for a whole new fleet of electric vehicles and battery grids. This industry is only just getting started.

US$150/BARREL OIL PRICE IS SUSTAINABLE

After the Russian invasion, oil prices rose from under US$100/barrel to US$125, subsequently retracing and has settled for the time being to just below US$120. This is volatility!

Rising interest rates and global recession fears are now weighing on price but over the long haul, oil has the potential to go much higher because it will take time for viable substitutions to be economically viable. We anticipate a sustainable price of US$150.

Karoon Gas (KAR): ASX Small Cap

Karoon Gas (KAR) is a pure play oil producer providing leverage to oil price movements. We took profits at $2.29 in March (ISSUE 488, 10 March 2022) locking in a 117% return. The stock is now $1.86 and we are again running the ruler over the stock.

Boost for LNG which is independent of gas pipelines

Voluntary or forced reductions in gas supply from Russia to Europe have provided a strong boost to global Liquid Natural Gas (LNG) markets and higher prices. LNG contracts are normally linked to oil prices. Higher global LNG prices have exposed undersupply of contracted gas in East Coast Australia markets, driving up average prices.

One we cover in our Blue Chip Value publication is Origin Energy (ORG), a beneficiary of high LNG prices through its 25% interest in Australia Pacific LNG (APLNG) at Gladstone, Queensland.

Elsewhere another we cover in Under the Radar Report is the emerging gas producer Cooper Energy (COE) which is benefiting from higher prices on Australia’s East Coast.

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What about nuclear energy?

Japan is now looking to nuclear as LNG supply diminishes and insufficient for base load power. As you can imagine, this is a big deal.

In response to increased tightness in LNG supply and price volatility, Japan has announced that it aims to restart more nuclear reactors to displace much of Japan’s power sector gas needs and help cut emissions long term. Japan is experiencing a power shortage crisis and can no longer rely on LNG. One of Japan’s stated motivations is also to help other counties reduce their dependence on Russia’s gas.

Under the Radar's Uranium stocks

Under the Radar Report covers the sector closely. Paladin Energy (PDN) and Boss Energy (BOE) have uranium production projects that have been given the approval for reopening in the current higher priced uranium environments. Both have operated successfully prior to earlier closure as a result of low uranium prices at the time.

High oil prices a tail wind for EVs and lithium

Amid the maelstrom of commodity price volatility, lithium stocks came under pressure with some analysts postulating that the key battery ingredient is over-supplied.

Under the Radar Report has done extensive analysis and believe that this represents a buying opportunity, which we detail in recent report, but is based on the high barriers to entry to this sector.

Lithium stocks are now starting to recover. Allkem (AKE) and Pilbara Minerals (PLS) are producers that have exposure to current high lithium prices and growing production.

Major investment in hydrogen for the future

Hydrogen is a long-term alternative for oil and gas for many applications, particularly as a road and shipping transport fuel. We tend not to hear too much of what is happening in the hydrogen space.  However, a recent article in Global Energy Hub pointed to global spend on producing hydrogen for energy purposes from now until 2050 will be US$6.8 trillion, with an additional US$180 billion spent on hydrogen pipelines and US$530 billion on building and operating ammonia terminals.

Fortescue Metals (FMG) has ambitious plans to supplement its iron ore business with a significant hydrogen arm, for which there is a huge market. Hazer (HZR) has a unique process to convert methane to hydrogen.

We will be detailing investment opportunities in hydrogen in the next two weeks. Stay tuned!

What's coming up:

✅  Dividend Small Cap portfolio: Earn extra income now

✅  Energy Focused Stocks: Hydrogen, Oil & Gas, Uranium, Lithium

✅  Best Stocks to Buy

✅  How to build a Portfolio

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