By David Rogers
Investing in energy stocks, especially refiners, at the start of the Iranian war has paid off handsomely.
March proved to be a brutal month for Australian equities as war in the Middle East and the unprecedented blockage of the Strait of Hormuz sent shockwaves through global markets.
The ASX 200 plunged 7.8 per cent, erasing its year-to-date gain as the price of petrol, diesel and jet fuel soared 50 to 80 per cent on fears about the nation’s dependency on overseas supplies.
But for investors who bought energy commodities or were positioned overweight Australian energy stocks, the impact of plunging benchmarks was significantly mitigated.
Energy was the best-performing sector with a 19 per cent gain. It was the best month for the energy sector since 2020, even exceeding its rise at the start of Russia’s invasion of Ukraine.
Crude oil surged 48 per cent, Asian LNG jumped 61 per cent and coal climbed about 20 per cent.
Oil refiner and petrol station owner Viva Energy was the best-performing stock, up 45 per cent. Yancoal, Karoon Energy, New Hope, Woodside Energy, Ampol, Whitehaven Coal, Beach Energy and Santos rose 18 to 42 per cent.
Jun Bei Liu, founder and lead portfolio manager at TenCap, says her team was overweight the energy sector heading into the crisis because the risk premium was underestimated.
“As soon as the war broke out, we added to the oil refiners – Ampol and Viva – rather than the producers like Woodside or Santos,” Liu says. “The refiners are a huge beneficiary of the war.”
Refining margins have surged because oil refining has been disrupted in the Middle East, and those refineries take about six months to come back online.
“That means even if the war is over tomorrow, those refiner margins will remain elevated for some time,” Liu says. “Both Ampol and Viva will report March quarterly results in the next month or so, and I expect they will make a huge amount of profit, particularly in the case of Viva.”
Viva is heavily geared with substantial debt, but the crisis will see the debt coming down very rapidly.
TenCap has taken some profit on oil names but remains overweight refiners.
Liu expects gas prices to stay elevated longer than oil, largely due to the damage to Gulf infrastructure. For example, Qatar says it will take up to five years to fix its main LNG export terminal.
Tim Zhao, portfolio manager at Lazard Asset Management, says his team was overweight energy before the crisis for different reasons – the build-out of data centres for artificial intelligence.
“We’ve been overweight in energy probably for the last few years,” Zhao says. “If you look at all the hyperscale spending, a large part of the spending is energy infrastructure.”
Lazard had 16 per cent of its funds invested in energy stocks before the war and has since trimmed to around 11 per cent, still well above the market weight of about five per cent.
The firm’s portfolios beat the index by 3-4 percentage points last month.
Zhao prefers gas over oil and holds large positions in Woodside, Santos, Viva and Whitehaven.
Matthew Haupt, lead portfolio manager at Wilson Asset Management, says his team increased energy exposure on the Friday night before the war started as rhetoric ramped up.
“We did increase energy weights on Woodside. Obviously, they sell more at spot,” Haupt says.
His team also went long Brent futures that night.
On the Monday after war broke out, he bought more Woodside and Ampol.
“The crack spreads just went through the roof,” Haupt says.
The team later shorted crude at $US120 a barrel and took profits around $US90.
Haupt says Wilson’s portfolios were down for the month on an absolute level but performed well relative to benchmarks. He believes there will eventually be a resolution to the crisis.
Emanuel Datt, principal at Datt Capital, has positioned himself into what he calls ‘energy intermediaries’ rather than direct commodity exposure.
Datt preferred stocks are Ampol and Viva, which produce about 20 per cent of Australia’s domestic fuel consumption.
TenCap’s Liu says the crisis will force every country to rethink energy security.
“That will structurally put a risk premium on energy prices,” she says. “Every company I spoke to – 10 industrial companies – are going to increase their diesel reserves from one to two months to three to four months.”
She warns that Australian consumers face a tough period with higher interest rates and soaring fuel costs. Consumer discretionary retail stocks are particularly vulnerable to earnings downgrades.
Wilson’s Haupt agrees. “If you’re a global player, it’s all about security now.”
“So if you’re going to do long-term contracts now, which geopolitical region are you going to go to?
“If you can contract Australian or US long-term LNG contracts, they look pretty attractive.”
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