Australia's biggest energy stocks have been downgraded by Credit Suisse analysts, who say their valuations have become too stretched.
Hot on the heels of downgrades to big-cap mining stocks by Citi and UBS this week, Credit Suisse is calling the top of the run of energy stocks this year, downgrading Santos and Oil Search to "underperform". It kept Origin Energy at "neutral" but downgraded its price target for the stock.
It comes as US-based analysts for the investment bank revise their long-run forecast for the oil price to $US65 a barrel over the next two years, down from $US75 a barrel. Brent crude oil is trading at $US52.03 a barrel, having risen 85 per cent from its multi-year low of $US27.88 in January.
A deal struck by OPEC members last month to curb supply added to the rally in the commodity and the sector.
"We do not expect the market to change its view overnight on oil," analyst Mark Samter said in a research note. "However, with valuations so stretched, we cannot support a positive view on the sector."
Downgrading Oil Search was "not a step we took lightly," Mr Samter said, because it was a good business and one of the few in the space generating growth. However, based on Credit Suisse's revised oil price targets, its valuation looked too stretched. The stock is trading on a forward price-to-earnings ratio of 24.6-times earnings.
'Uncomfortable conclusion'
Outside of mergers and acquisitions, Woodside presented few organic growth opportunities, but while spot LNG prices were troubling, this stock was one pick for those wanting to keep some exposure, Mr Samter said.
The assumed oil price built into the share prices of the top four energy stocks - Woodside, Oil Search, Santos and Origin - showed Woodside and Oil Search had oil at $US72 and $US70 a barrel respectively at spot Australian dollar prices, higher than Credit Suisse's target and higher than their US counterparts.
This made the analysts uneasy, because it was rare that oil prices were in contango (where the spot price is lower than the future price), while the Australian dollar was the opposite, where the current price was higher than the forecast price, Mr Samter said.
"We entirely acknowledge that no exposure to the energy sector may not be a risk many investors are willing to take on," he said.
"While it feels to us that the whole sector is expensive, it is an uncomfortable conclusion for us to reach too."
The analysts cut the target price for Oil Search from $6.30 to $5.80, Santos from $3.90 to $3.50, Origin Energy from $5.90 to $5.40, and Woodside Petroleum from $26.80 to $25.50, retaining its underperform rating on the stock.