Why the oil, gas and coal surge should be put into perspective

Traditional energy stocks have enjoyed a strong run as coal, gas and oil prices surge, but are they a good investment opportunity?

“Dead man walking” is a term that describes a death row prisoner being led to execution, the title of an Oscar-winning film, and more recently an investment view about traditional energy stocks.

Many investors are shunning companies linked with fossil fuels such as oil, gas and coal, while traditional electricity providers such as AGL and Origin Energy have also struggled on the sharemarket.

But the current global energy squeeze – featuring coal shortages in Asia, gas shortages in Europe and a surging crude oil price – has delivered investors in some traditional energy stocks some spectacular gains.

Coal company shares in particular have sparkled. Whitehaven Coal has trebled in the past year, and New Hope Coal has more than doubled.

Petroleum stocks Woodside, Santos, Oil Search and Beach Energy have also done well in recent months.

The S&P/ASX 200 Energy index is up 29 per cent over the past year, so are investors prematurely writing obituaries for these fossil fuel stocks?

Perhaps, and we’ll have a better idea once we see how the current global energy shortages play out, but the recent strong rises should be put into perspective.

Coal company share prices have surged in recent months but still remain relatively weak.

Almost every large traditional energy stock is still trading well below where it was before the pandemic – with many at half their previous price or worse.

In comparison, the new kids on the energy block – renewable power producers and lithium miners that benefit from the growing electric vehicle market – have been booming.

Vulcan Energy is up more than ten-fold in a year, Orocobre’s share price has trebled, and exchange traded funds that offer investors exposure to many climate-friendly stocks are performing well.

The world will continue battling oil, gas and coal shortages while economies rebound after the pandemic. And the road to a cleaner future will be filled with twists, turns and potholes for investors.

Polluting power stations will be switched off prematurely, countries such as China and Russia won’t switch anything off for years, and the strong march towards electric vehicles will send supply and demand equations out of whack.

While you would have been much better investing in green energy stocks rather than old energy stocks a few years ago, this doesn’t mean that the old guard will die off completely.

The 1996 film Dead Man Walking got a swag of Oscar nominations, and Susan Sarandon won the Academy Award for Best Actress.

Many are transforming their businesses. Santos and Beach are working on carbon capture and storage in depleted gas reservoirs, while AGL is splitting into two companies next year – one to hold its old polluting assets and the AGL name remaining as a retailer and green energy producer.

The growth of green hydrogen and other renewable technologies will run into political barriers, as we’ve already seen in Australia.

Anyone considering an energy share investment of any kind should:

• Only invest if they understand a company’s existing assets and future plans.

• Beware of greenwashing, where funds and companies artificially inflate their green credentials.

• Be prepared to be patient and ride out the inevitable ups and downs.

• Consider buying into a stock gradually to avoid being caught on the wrong side of a sudden slump.

While coal, oil and gas will still be used in the coming decades, the global push for net zero carbon emissions by 2050 means the writing is on the wall.

There will be winners that transform themselves, but there is also likely to be carnage for investors. It’s an interesting period to be living through.

Originally published as Why the oil, gas and coal surge should be put into perspective