THESE ENERGY STOCKS ARE HEATING UP FOR INVESTORS
Patience key, but as price gains moderate, profits likely will, too
Energy stocks have gone from a dark stain dragging down portfolios to the bright spot that’s lighting them up. But don’t assume the gusher of profits will continue, as many question if the price of oil can maintain its rise.
Talk about a reversal of fortunes. The Standard & Poor’s 500 index energy sector is up 14.6% this year — making it the best of the 10 sectors in the market by far. Six of the 10 best-performing stocks in the S&P 500 this year all hail from the energy sector.
Energy stocks’ powerful rally sends ripples well beyond the energy patch. A 38% rally in crude oil prices and 6% gain in natural gas this year is turning energy stocks — which account for 7.4% of the S&P — into a driver rather than an anchor as the market runs at new highs.
Energy stocks have been the biggest drag since the market peaked on May 21, 2015 — with energy stocks falling 12% as oil prices dropped 16% during the same time. That’s just the tip of the pain: The S&P 500 Energy sector index shed nearly half its value from its high in July 2014 to its recent low this past January.
But energy stocks now are
pushing, not pulling. The sector’s powerful rally this year is a big reason why the market is making a serious run at another high. The S&P 500 is up 3.7% this year and is 0.5% away from its peak.
Investors are benefiting — for now. “Energy stocks are a ‘no news is good news’ sector at the moment. They offer a 3% dividend yield even if crude stays where it is. Oil is already up nearly 100% from its low,” says Jack Ablin, chief investment officer at BMO Private Bank. Oil prices have jumped 94% from their low of $26.21 a barrel on Feb. 11.
If there’s a stock that demonstrates the changing fortunes ofi investors it’s Southwestern Energy. The oil and gas exploration company based in Spring, Texas, is tops in the S&P 500 this year and has vaulted 80% from the market’s recent low. Jumping energy prices, specifically natural gas, “flood the bottom line” at the company, causing investors to expect profit to soar, says Subash Chandra, analyst at Guggenheim.
“You go from a company that’s on the ropes to one that has a lot better options,” Chandra says.
Analysts now expect the company to lose 26 cents a share this year, dramatically less than the 52 cents a share loss they expected two months ago, according to S&P Global Market Intelligence. Analysts think the company will be profitable to the tune of $164.6 million in 2017, up from the $1.2 billion loss expected in 2016.
Shares of ONEOK, a Tulsabased energy distributor, also have soared as “investors (are) getting more comfortable with risk,” says Ethan Bellamy, analyst with Robert W. Baird. Many energy stocks, ONEOK included, were pushed to “severely oversold condition,” and the rally now is repairing the excessive damage.
But the near term isn’t likely to be rosy as energy price gains moderate, Bellamy says.
Many investors are also falsely thinking rising commodity prices will keep pushing profits directly to the bottom line. That’s too short-sighted, Chandra says. Many companies have loaded up on debt that needs to be repaid even if energy prices hold steady. There will likely be costly investment needed for many firms to rebuild capacity that was closed or sold due to low oil prices. Higher energy prices are “a windfall in revenue, but not a windfall in free cash flow,” he says, which is what matters for investors looking for dividend increases.
The key is patience — holding on not for the next three months, but rather, the next three years.
“If you’re buying energy stocks now, do it as an investor with a three-year outlook, not as a speculator looking for a repeat of gains from February to June,” Bellamy says.