Energy stocks are running higher today but the good times may not last with a top broker predicting that two notable members of the sector are likely to underperform through to February next year.
The S&P/ASX 200 Energy (Index:^AXEJ) (ASX:XEJ) index jumped 0.8% during lunch time trade thanks to a firmer oil price.
The Woodside Petroleum Limited (ASX: WPL) share price is 0.9% ahead at $34.54, the Beach Energy Ltd (ASX: BPT) share price is 1% firmer at $2.60 and the Santos Ltd (ASX: STO) share price is 0.7% in the black at $8.26.
Near-term turbulence
But there's a high probability that the Beach Energy and Santos share prices will underperform the sector over the next 45 days, according to Morgan Stanley.
The broker believes there is a more than 80% chance of Beach Energy lagging because the stock has overshot to the upside.
"The stock has traded up recently, making short term valuation much less compelling," said Morgan Stanley.
"Beach has traded materially higher over the past week on very little news. The stock is now trading near 30% above fundamental valuation. We expect it to slowly decline absent any material announcement."
The broker's recommending the stock as "equal-weight" (equivalent to a "hold") with a price target of $2 a share.
Overshooting on the upside
The bearish prediction for Santos largely stems from the same argument. Morgan Stanley estimates that there is a 70% to 80% probability that Santos will struggle to keep up with its peers over the next month and a half.
"The free cashflow story at Santos has changed following the Darwin acquisition," said Morgan Stanley.
"Given outperformance and limited further ability to reduce costs significantly we expect some switching into other Australian E&P companies."
Big winners in 2019
The broker rates Santos as "equal-weight" with a price target of $8 a share.
It's also worth noting that Beach Energy and Santos are sitting on stellar gains over the past year. The BPT share price more than doubled since January and Santos rallied 56%.
In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is sitting on gains of around 21% over the period.
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