Energy picks: Santos and Oil Search

Financial Journalist
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Are energy stocks good value or a dangerous value trap? That question is testing contrarians who see obvious value in beaten-up oil and gas stocks and are hunting for signs that the worst is over. The latest profit-reporting season gave hope, but it all depends on oil-price assumptions.

Morningstar, for example, has a US$100 a barrel forecast for Brent oil from 2018. Macquarie Equities Research assumes US$87.50 for Brent in 2017. The spot price is $US59.78. If these and other brokers are right, the energy sector looks reasonable value.

After savage price falls, 37 energy stocks that Morningstar analyses globally had a five-star rating in January 2015, meaning they were significantly undervalued. The median energy stock covered traded 27% below fair value and Morningstar said energy was “the cheapest sector”.

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