In a tough market, the prospects for energy stocks don't look bad.
A recovering global economy, along with a newfound ability among oil-producing nations to manage supply, has led to a 122% gain in crude oil prices from their lows of last year. Still, investors have been slow to move into the energy sector, particularly the big integrated oils, believing that oil prices would fall again.
Lately, though, that has changed. Though nobody recognized it a year ago,
has found a new resolve, and many now believe it will be successful in keeping oil in the $20-$25-a-barrel range. (It was up 35 cents to $25.92 late Monday afternoon.) Analysts' year-end oil-price estimates have been creeping up. And lately, the energy sector has been gushing. Even after the recent selling (including a 2.8% drop Monday), the
Amex Oil & Gas Index
is 14.4% above its February low.
Much of the buzz has been about first-quarter results, which look strong -- incredibly strong when compared with last year's poor first-quarter showing. Analyst estimates call for energy-company earnings to gain a stunning 182% over last year, according to
First Call/Thomson Financial
. Those estimates were revised up from a Jan. 1 expectation of 132%. Such upward revisions are often a sign that companies earnings will come in significantly better than expected. Some reckon the move oil stocks have seen is just the beginning.
Like Oil and Slaughter
"There's a lot more upside," says
domestic and international oil analyst Frank Kneuttel. "As money flows out of the dot-com and telecom companies, that suggests money flows going into oil -- which is frankly what we looked for from the beginning of the year." In particular, Kneuttel believes big oil companies such as
, and refiners like
have room to move. (PaineWebber hasn't done underwriting for any of those companies.)
Yet whether energy companies can sustain their upward trend depends greatly on the price of oil, and that is a difficult thing to divine. For oil to remain in the $20 range depends not only on OPEC's ability to remain disciplined, but on the general state of the world economy. One of the big reasons oil prices ran so high, despite expectations to the contrary, was that nobody -- OPEC included -- believed that the world economy would stage the kind of comeback it has. The rate of economic growth will be a huge factor in whether oil prices can stay up here.
"We've got confidence in an oil-sector overweight on a near-term basis -- through summer," says
equity strategist Doug Cliggott. "Once we get beyond August, September, we're going to have to look around and say, 'How much did the
Fed do? What do current economic indicators in the U.S., Europe and Asia look like?'"
The price of oil itself can have an effect on these things. OPEC ministers loosened up supply when they met late last month not because of some sense of altruism, but because they worried that oil prices had gotten so high that they would hurt the global economy. This is as much of a risk to oil companies as low prices, and perhaps more of one. High energy costs constrain economic growth, and when they go too high, they can even lead to recession. Slower growth means less demand, which ultimately can lead to sharply lower oil prices and diminished profits.
"The main risk that we've been thinking about is that higher oil prices would have an impact on demand," says Kneuttel. "Nevertheless, with tight inventories and constraints to supply, the demand issue is not the overriding one at this point." Monday, Kneuttel raised his 2000 estimate on Brent crude by $2, to $23.50. He also raised earnings estimates for the year on nearly all of the companies he covers.
And no matter what happens in the far-off future, oil stocks may be setting up for a good move over the next half-year. The energy sector tends to outperform the
in the second and third quarters, and historically it has done well when interest rates are heading higher -- as they continue to do.