In the turbulent seas of the stock market, AGL Energy Limited (ASX: AGL) finds itself weathering a low energy period, witnessing a 12% decline in November. This slump stands in stark contrast to the S&P/ASX 200 Index (ASX: XJO), which rose by 4.5%, underscoring AGL's underperformance by more than 16%.

Image Credit: Pexels


December Blues: AGL's Continued Descent

Regrettably, December brings no respite for AGL shares, witnessing an additional 4% dip. Since the end of October 2023, the company has endured a cumulative decline of 16%. AGL operates in two primary segments – retailing to customers and energy generation.

Underlying Profit Boost Amidst Challenges

AGL's current solace lies in a boost to its underlying net profit after tax (NPAT) fueled by surging wholesale prices. The company anticipates a potential doubling of FY24 underlying NPAT due to locked-in higher wholesale prices and improved energy generation availability.

The Unfavorable Horizon

However, the market, with its characteristic focus on the long-term, seems less optimistic. A warm winter and the proliferation of rooftop solar have led to a decline in wholesale electricity prices, impacting AGL's profitability outlook beyond FY24. The ABC reports that wholesale power prices in the national grid have dropped significantly, a trend likely to persist.

Challenges and Investments in Renewable Energy

AGL faces challenges in the form of substantial investments required for renewable energy generation and energy storage in the coming years. Despite potential benefits from a hot summer due to El Nino, the increasing prevalence of solar and cost-effective coal may counterbalance any positive impact on prices.

Hope on the Horizon? UBS's Positive Outlook

Despite the storm clouds, broker UBS sees potential positives in the future. The potential exit of some or all of Origin Energy Ltd's (ASX: ORG) Eraring Power Station capacity in mid-2025 and lower generation availability from competitors could contribute to a positive shift in wholesale electricity prices. UBS draws attention to historical patterns, noting a 30% year-over-year lift in electricity prices during the transition from La Nina to El Nino weather patterns.

AGL's Silver Lining and Share Performance

While challenges persist, there are glimpses of hope for AGL in the eyes of analysts. The AGL share price, despite recent downturns, has climbed by 12.50% since the beginning of 2023.

In conclusion, AGL Energy faces a complex landscape, navigating through short-term boosts and long-term challenges. The path ahead involves addressing market dynamics, embracing renewable energy, and finding resilience amidst changing weather patterns. As investors brace for potential headwinds, the stock market will keenly watch how AGL steers its course in the evolving energy markets.