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Jan. 7, 2021, 8:05 a.m. EST

How To Play 2021's First Oil Rally

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Jan 07, 2021 (Baystreet.ca via COMTEX) -- Oil-and-gas stocks are just coming off one of their most tumultuous years in history. In 2020, the oil and gas sector was hit with a triple-whammy of a senseless price war between two of the largest producers; unprecedented destruction in energy demand and the inexorable march of the clean energy and ESG megatrends. Those factors worked in tandem to condemn the sector to another annus horribilis where it, yet again, emerged as the worst-performing of the U.S.' 11 market sectors. But the oil and gas sector is once again proving that it might be down but most definitely not out.

The energy sector has lately staged a very impressive rebound, outperforming the S&P 500 after gaining 34% in the space of three months with a large chunk of those gains, ironically, coming after Joe Biden was declared president-elect.

The rally is largely being fueled by growing hopes that we can finally vanquish Covid-19 and return to normal life thanks to the availability of multiple vaccines as well as continuing production discipline by OPEC+.

Opinion on the future of the industry remains divided. On the one hand, the bears and shorts contend that the sector is little more than a value trap that is doomed to come crashing down again as renewables gain the ascendancy. On the opposite side of the spectrum, the bulls and longs counter by pointing out that it might be decades before renewables and EVs can fully challenge the oil and gas hegemony.

The current oil rally certainly is an encouraging indicator, though not necessarily a be-all harbinger. Still, it's the bulls and the dumpster divers that appear to have the upper hand here.

In its Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) has predicted that Brent prices will average $49/b in 2021, up from an average of $43/b in the fourth quarter of 2020. EIA has forecast Brent prices will average $47/b in the first quarter of 2021 and gradually rise to an average of $50/b by the fourth quarter as more people get vaccinated and the economy reopens.

But even EIA might be too conservative, and one Forbes analyst sees Brent averaging $55 in the current year, which would provide a 15% uptick for the entire sector.

If you belong to the bull camp, here are three key ways to play the oil and gas rebound in 2021.

#1 Undervalued companies with improving fundamentals Oil and gas companies with improving fundamentals, especially those that have pared down their debts or successfully restructured appear to be returning to investors' good books.

One such company is Antero Resources Corp /zigman2/quotes/206228792/composite AR -2.96% . AR shares are up 134% over the past 12 months and 15% in the first two trading sessions of the new year. Colorado-based Antero Resources is the 3rd largest U.S. natural gas producer, pumping 3.2 bcf/d of natural gas from the Appalachian Basin where it owns 612,000 net acres of oil and gas properties sitting on 18,893 billion cubic feet (535 billion cubic meters) of estimated proved reserves.

/zigman2/quotes/206228792/composite
US : U.S.: NYSE
$ 9.51
-0.29 -2.96%
Volume: 8.27M
March 2, 2021 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$2.95 billion
Rev. per Employee
$5.01M
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