Wall Street sweet on oil

Investors are betting recovery may be coming

Share prices of major U.S. energy producers have climbed an average of 20 percent over the past six weeks, another sign that the battered industry may be nearing bottom and heading toward a recovery after a brutal downturn.

Wall Street is historically forward-looking, often predicting turning points months in advance. In 2009, for example, stocks began their rally in March, three months before the last recession ended.

Since February, when oil tumbled to its recent low of $26 a barrel, energy stocks have surged 50 percent as investors bet that oil prices, which climbed above $48 a barrel this week, will continue to rebound.

Investors have thrown struggling oil and gas drillers that have issued new stock a $13 billion lifeline, boosting the companies’ efforts to increase their capital and shore up their finances. Those shares are now worth a combined $17.6 billion.

Local companies, meanwhile, are benefiting from Wall Street’s optimism. In the two months since it raised $1.3 billion through sell-

ing more stock, shares of Houston-based Marathon Oil Corp. have risen 68 percent. Houston’s Newfield Exploration stock has climbed 70 percent since it raised more than $800 million in February.

“People decided it was time to invest,” said Rob Santangelo, an investment banker at Credit Suisse in New York.

Both investors and drillers have searched for months for a bottom to the oil bust, which began nearly two years ago when crude prices peaked above $100 a barrel. The plunge that followed swept away scores of U.S. oil companies, thousands of jobs and billions of dollars in market value.

It’s far from certain that oil prices will keep trending upward. Last summer, it appeared the industry was on the brink of recovery as crude prices reached about $60 a barrel. But that didn’t last long. Prices tumbled to $38 a barrel in a matter of weeks and continued to slide this year.

Output has dropped

But this year’s oil rebound could prove more lasting. Crude production in the United States has

dropped by more than 500,000 barrels a day, and analysts believe the nation’s output will fall enough to correct the global oversupply sometime this year.

Other oil-producing nations have also cut production as demand grows; U.S. gasoline consumption has reached the highest level in a decade, the Energy Department reported this week.

Wildfires in Canada and militant attacks in Nigeria that have disrupted supplies are also contributing to the rising oil prices. Wall Street investment bank Goldman Sachs, which earlier this year predicted crude prices could fall as low as $18 a barrel, now says oil could hover around $50 a barrel in the second half of 2016, a threshold at which shale drillers in many U.S. regions could start making money by developing new wells.

U.S. crude settled at $48.16 a barrel on the New York Mercantile Exchange on Thursday, down 3 cents.

As the outlook for oil has improved, investors have bought into nearly 30 stock sales by U.S. drillers

this year, spending a record $10 billion in the first quarter alone, according to Credit Suisse. If shares keep rising, oil companies could raise some $15 billion to $20 billion, if not more, in the stock market this year, he added.

Paying off debts

Oil companies are using those funds to repay debts and gear up for the next upturn in prices.

Analysts have noted that U.S. drillers have started to lock in higher prices for future production — a process called hedging — and appear to be turning on some of the wells they drilled but left dormant over the past two years.

“It has turbocharged the recovery,” said Jaime Webster, an oil market analyst in Washington. “There’s a lot of upside potential for markets.”

The pain, however, is not over for many oil companies still struggling to service large debts incurred when oil prices were high. Fitch Ratings, a New York credit rating firm, says the share of U.S. drillers failing to make payments on their highinterest debt, or so-called junk bonds, has already reached a record 27 percent, and could rise as high as 35 percent this year as more companies skip payments and file for bankruptcy.

“The defaults are still coming,” said Eric Rosenthal, senior director of U.S. leveraged finance at Fitch.

“It’s a matter of when rather than whether they’ll default.”