Investors Wait for Oil Stocks to Rebound
Assuming the 1960s sitcom "The Beverly Hillbillies" got a 2017 reboot, and good ol' Jed Clampett were to stumble on "a-bubbling crude," it's not a stretch to think he'd just mosey on by that oil and look instead for a smartphone prototype that some Apple exec dropped in the woods.
Yes, the oil sector continues to struggle for many reasons -- continued low gasoline prices among them, combined with an administration in the District of Columbia that's had much bigger fish to fry than to vigorously push a pro-oil policy.
Witness the performance of key oil stocks over the last 12 months. Exxon Mobil Corp. (ticker: XOM) is down more than 13 percent and currently trades at about $80 per share. BP ( BP) is off about 2 percent to $34 and Chevron Corp. ( CVX) ran out of gas with its post-election bounce, ending the 12 months flat at $103; since Jan. 1, it has slumped some 13 percent. One of the rare winners is Canada's Suncor, with the Calgary-based company up roughly 17 percent to just shy of $31.
[See: Oil ETFs: 8 Ways to Invest in Black Gold.]
As for where the sector stands today, and where it's headed in the near term, experts point to the irony that the industry has played a role in keeping prices down, in effect yanking the tiger from the tank.
"Depressed commodity prices have held back the energy sector, which has primarily been driven by moderate demand growth offset by incredible efficiencies in the production of shale reserves," says Josh Sherman, based in Houston and partner in charge of the Complex Financial Reporting group at Opportune.
Sherman sees some upward mobility in the sector, pointing to stocks such as EQT Corp. ( EQT) and Encana ( ECA).
"Current price levels and limited price volatility are enough to help good companies focused on single [oil production] basins such as the Permian, SCOOP/STACK and Eagle Ford. However, something has to change in the global demand for oil and natural gas to create a lasting uplift."
And because the oil glut may persist, "It's important to find companies that can weather the storm," says Brent M. Wilsey, who owns and operates San Diego-based Wilsey Asset Management.
Wilsey points to Marathon Oil Corp. ( MRO) as an example.
"The company has a strong balance sheet ... and if we look at the price/tangible book value of 0.83, we see it's well below the industry average of 3.26. This is a tremendous value as you're paying just 83 cents for every dollar of tangible equity."
For those looking to the current administration to gusher in a new era, don't bet on it.
"U.S. policy will likely have little impact on the price of oil and thus the economics of the energy business," says Andrew Wetzel, senior vice president and portfolio manager at F.L. Putnam Investment Management Co. in Wellesley, Massachusetts. "Reduced regulatory burdens may at the margin improve profitability. But at this point, the best operators understand that efficient, clean operations that maximize the value of produced volume are far superior to the volume-at-all-cost model of the past."
Meanwhile, crude oil prices are slipping even as OPEC seeks to curb production. A major reason is that the OPEC move (which included some non-OPEC countries) left out two nations now exploiting the production gap.
[See: The Best Energy Stocks to Buy for 2017.]
"Libya and Nigeria were excluded due to the unique challenges impacting those countries," says Robbie Fraser, commodity analyst at the global firm Schneider Electric. "They've been able to use that exempt status to chart significant production gains, with Libya alone adding 500,000 barrels per day compared to a year earlier."
Meanwhile, reports at the end of June indicate U.S. crude production is up 1.5 percent from 8.95 to 9.08 million barrels per day, according to Chris Kim, chief investment officer of Tompkins Financial Advisors in Ithaca, New York.
"Analysts believe the U.S. could reach 9.6 million barrels by end of 2017," Kim says. "Rising production is positive for the underlying fundamentals of energy names but those positives are being trumped by sentiment."
Thus it could be that investors who hoped to strike it rich last year when energy prices bounced up a bit are now punishing oil-related stocks.
"Oil hit historic lows in 2014 and 2015, causing many speculative investors to go long on oil futures and other oil investments," says Evan Tarver, investments analyst at FitSmallBusiness.com.
Yet after the early 2016 mini-recovery, "Oil has been volatile, causing many spec investors to lose money," Tarver says. "This is because many futures traders thought the uptick in the first half of 2016 would continue. It didn't, and it's been dragging down the energy sector ever since."
So, too, have popular new electric cars by the likes of Tesla ( TSLA) and General Motors Co. ( GM).
"Mass production of electric vehicles drastically increased within the past few years," says Jared Lazerson, CEO of MGX Minerals in Vancouver, British Columbia. "While oil still continues to power the majority of cars on the road, the predicted exponential growth in demand for EVs and potential for global oil demand to soon hit its peak are also contributing to a bearish outlook."
In the end, lower oil stock prices will likely yield at least one happy consolation prize: lower gas prices. But how low can they go?
[See: 5 Automakers to Rev Up a Long-Term Investor's Portfolio.]
Says Tarver: "Shell's CEO was recently quoted as saying that oil prices will be 'lower forever,' meaning that we shouldn't expect oil prices to take a long time to rebound but that they might not rebound at all."
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