Energy costs are skyrocketing, so much so that it’s taking up the front pages of newspapers.
Russia’s invasion of Ukraine has triggered an international shortage that has reached all the way to the other side of the planet, with gas and electricity providers hiking prices.
The energy crisis is so bad that one electricity retailer this week urged customers to switch to another provider before their bill doubles.
Morgans analyst Max Vickerson took a look at the situation and picked which one he would back:
Energy retail market in crisis
The crisis is starting to have a snowball effect. Smaller retailers urging their own customers to leave will reduce competition in the medium term.
But this is good news for bigger power providers.
“Retailers like AGL that can cover most of the higher wholesale prices with fixed fuel contracts should see margins expand,” Vickerson said on the Morgans blog.
He explained that spot prices for power are remaining “stubbornly and consistently high”, indicating it’s not short-term demand surges that are causing the cost spike.
“In that kind of environment baseload generation is the most effective and fuel efficient method to cover spot market exposures.”
Baseload futures indicate spot prices will remain high well into the 2025 financial year.
AGL vs Origin: The verdict
So is Origin or AGL the better buy at the moment?
Origin this week announced a significant downgrade to its outlook, which saw its share price tumble 15% in one day.
But it’s not like AGL hasn’t had its problems. Technology entrepreneur Mike Cannon-Brookes led a shareholder campaign that forced the company to drop demerger plans and saw its chair and CEO depart last week.
Despite the governance issues, Vickerson feels like AGL is in a better position to navigate through the current energy crisis.
“AGL’s fixed price NSW coal contracts, better logistics and its integrated mining operation in Victoria will insulate it from the worst of the forces that have driven Origin to withdraw its FY23 energy markets guidance.”
He expects AGL will fix its boardroom issues soon enough, and rates the stock as a buy.
“AGL Energy’s standing has suffered because of the wrangling over the long term direction of the company, but the generation assets support stronger margins as consumer prices increase.”
Meanwhile, Vickerson is “wary” of buying into Origin shares, despite the current discount.
“By withdrawing guidance, management has highlighted the risks that can get amplified while spot electricity markets are so unruly,” he said.
“We retain our hold rating and will wait to see how the wholesale market fares during the coming peak winter season.”
The Origin share price is up 13.25% year to date, notwithstanding this week’s plunge. AGL shares have risen a tidy 38.35% since the start of the year.
Both pay reasonable dividends. AGL has a current yield of 5.7% and Origin 3.3%.
The post Energy crisis: Which is the better buy, AGL vs Origin? appeared first on The Motley Fool Australia.
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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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