Waiting for Energy Stocks to Refuel

While every consumer with a driver's license has celebrated the low cost of gasoline in 2016, sage investors would urge unschooled investors to take their adoring eyes off the pump and pump up their portfolios with energy stocks instead.

For indeed, the energy sector has seen better days, given that as recently as 2011, a gallon of regular unleaded gasoline averaged $3.53, according to U.S. Energy Information Administration data. Today, it costs $2.27 -- down 36 percent and at levels last seen in 2009.

And despite a modest uptick in gas prices thus far in 2016, energy companies still struggle to fill up the investment equivalent of an empty tank.

[See: Oil ETFs: 8 Ways to Invest in Black Gold.]

"Although oil stocks have jumped quite a bit from their February lows, they still reflect a lot of uncertainty and fear," says David Twibell, president of Custom Portfolio Group in Englewood, Colorado.

"While some of that is warranted given the dearth of global economic growth, there's really no escaping the fact that oil demand is moving higher and oil production is heading lower," Twibell says. "Unless we see a major global recession, that dichotomy should eventually produce higher oil prices."

And where some say "eventually," others say "inevitably" -- it's simply a matter of how soon.

"Given the recent weakness, it is important to stress to investors that from a simple cost basis, $40-a-barrel crude prices are not sustainable," says Matthew Michael, emerging market debt and commodities product director at Schroders, based in London.

And so let the market games begin -- with eager investors revving up for the race to bargains.

"My analysis indicates that while prices are depressed, this window represents an excellent opportunity to invest in oil and oil services as pre-positioning strategy for the upcoming oil price shock," says Albert Goldson, executive director of Indo-Brazilian Associates, a New York-based boutique global advisory firm and think tank that specializes in the energy sector.

Goldson sees scenarios in places from Venezuela (plummeting production) to Nigeria and Iran (overestimated production in the near term) as conspiring to make the current oil glut a short-lived one: "Should more than one of these scenarios come to fruition, we may expect an oil price spike."

But as with anything else involving investment and geopolitics, it's complicated.

"While OPEC can attempt to limit production in an attempt to raise prices, various challenges can and have impeded this success," says Bob Silvers, managing director of energy and live sciences at management consulting firm SSA & Co.

Silvers says these include "OPEC agreeing and adhering to their own production rates, their need to finance their budgets and the ability of the U.S. to quickly ramp back up to 2015 production levels, filling some of this void and gaining more market share, to name a few."

On the balance, observers believe the fundamentals of the energy market point to 2017 as a key year for price recovery.

"Based on the comments from the latest earnings report from Schlumberger (ticker: SLB), it appears that several energy companies are ramping up production in anticipation of higher energy prices," says David Yepez, investment analyst and portfolio manager at Exencial Wealth Advisors, based in Oklahoma City.

Houston-based SLB is the world's largest oilfield services company "and has a good track record of accurately forecasting energy prices," Yepez says. "Schlumberger believes the sector is poised for recovery, which is very reassuring." It would also be good news for SLB, which is down 25 percent from two years ago and trades at $82 per share.

[See: The 10 Energy ETFs That Will Clear Your Conscience.]

But if you're looking for a winner right now, consider the oil and gas storage and transportation sub-sector, which has jumped in value a full third on a year-to-date basis.

"Oneok (OKE) and Spectra Energy (SE) were two of the year-to-date outperformers in this sub-industry," says Andrew Birstingl, research analyst at FactSet Research Systems in the greater New York City area. In fact, OKE has jumped more than 80 percent since January -- trading at $45 per share -- while SE climbed 45 percent, to about $36 per share.

"Within the S&P 500 Energy sector, five of the six sub-industries are expected to see an improvement in year-over-year earnings in 2017," Birstingl says. But it's not yet a profits gusher worthy of punchbowls for everyone.

"Aggregate earnings for the S&P 500 energy sector in 2017 are still projected to be well below the aggregate earnings recorded in 2014," he says.

"Is the energy sector making a comeback? When it comes to the utility market, the answer is an unwavering 'yes,'" says Swap Shah, CEO and co-founder of FirstFuel Software.

Citing low commodity prices and deregulation, "utilities today have a huge opportunity to innovate and gain competitive advantage," Shah says. "For the first time, they're able to break free of traditional models and use new strategies and techniques that differentiate them from other industry players -- and gain significant market share."

In the meantime, oil remains on a wild ride worthy of a tanker truck on grease slick.

"After reaching a low of just above $26 per barrel in February, oil staged a rally to nearly double in price to $50.56 per barrel in early June," says Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University's Cox School of Business "But since that time, the market has retreated again 20 percent into bear territory at slightly over $40 per barrel."

So how to gauge the next wave of upward movement? "Measures of recovery in this next up-cycle are likely to be very different than previous ones: Old benchmarks may not work," Bullock says. Counting the number of active oil rigs is a favorite metric, "but production generated from a rig count of 1,600 to 2,000 rigs can likely be accomplished with 700 to 1,000 rigs today."

And some investments may remain on the downside for a long time -- even if a comeback revives the rest of the energy market.

"The one major winning bet during the oil price down-turn was owning Gulf Coast refiners," says Andrew Wetzel, senior vice president and portfolio manager at F.L.Putnam Investment Management Co. and based in Wellesley, Massachusetts. "But the fortunes of refiners have turned as the glut of oil has become a glut of refined product."

[Read: What to Expect at the Pump This Driving Season.]

And so the bottom line: "The refining golden age is likely over," Wetzel says, "making refiners a losing long-term bet, though there will be trading opportunities."

A former longtime staff writer, editor and columnist at the Chicago Tribune, Lou Carlozo writes about investment for U.S. News & World Report, and personal finance for Money Under 30 and GOBankingRates. He is based in Chicago. Connect with him at linkedin.com/in/loucarlozo.