By Philip van Doorn, MarketWatch
Energy stocks have gone from worst to first — and may even extend gains in the months ahead.
The S&P 500 Index /zigman2/quotes/210599714/realtime SPX +1.46% of the largest U.S. stocks dropped 11.1% (with dividends reinvested) in August’s mini-crash from the close of trading Aug. 17 through Aug. 25. Since then, the benchmark has come roaring back, gaining 13.1% from the close on Aug. 25 through Monday.
And here’s how the 10 sectors of the S&P 500 fared during the August correction and the subsequent rebound:
|S&P 500 sector||Total return - Aug. 17 through Aug. 25||Total return - Aug. 25 through Nov. 2||Total return - 2015||Total return - 3 years|
|S&P 500 Index||-11.1%||13.1%||3.9%||58.5%|
During the six-session decline from the close on Aug. 17 through Aug. 25, the energy and information-technology sectors fared worst, but they’ve beaten all other sectors since Aug. 25, outweighing, by far, what was lost during the summer turbulence.
If you move one lower on the list, you can see that the financial sector hadn’t yet made up what it lost, at least through Monday. The relative weakness of financial stocks during the recovery likely reflects disappointment that the Federal Open Market Committee decided to wait before raising the federal funds rate, which has been locked in a range of zero to 0.25% since late 2008. Most banks are positioned for rising net interest margins, once interest rates begin rising.
The S&P 500 information-technology sector is trading for 16.5 times weighted aggregate average earnings estimates among analysts polled by FactSet. That’s up from forward P/E ratios of 15.3 a year ago and 13.5 two years ago. So it doesn’t appear to be a time for bargains among tech stocks.
So what’s going on with the energy sector? West Texas crude oil for December delivery /zigman2/quotes/209727478/delayed CLZ25 -0.18% closed at $46.14 a barrel Monday, up 14% from the close on Aug. 25. During periods of weak prices for energy commodities, there have always been investors who scooped up stocks of stronger producers on the cheap to make a killing when the market recovered.
That begs the question of how long an investor is prepared to wait for this sort of bet to pay off.
Credit Suisse analyst Jan Stuart said on Friday that U.S. crude-oil production “is simply, really falling.” This is, of course, just what Saudi Arabia is trying to accomplish through its refusal to cut production after oil prices more than halved. Rather than to follow its traditional course of propping up the price of oil, the kingdom, along with its OPEC partners, is trying to squelch the U.S. shale-production industry that transformed the international oil market. The strategy is working because shale production is much more expensive pumping from traditional wells. For one thing, shale production requires the continual development of new sources and the building of new rigs.
“Aside from the downturn in U.S. supply, OPEC gains have reached a plateau, and demand growth, meanwhile, remains robust. Provided the macro environment remains more or less benign, inventories should stop rising abnormally this winter,” Stuart said. That means investors may have to be patient, despite the strong recent action for oil stocks.
It’s safe to say we’ll see a lot more consolidation or bankruptcies among smaller, specialized shale-oil producers. So the big, strong integrated oil companies can take advantage of the disruption and gain market share in time for the eventual rebound in oil prices.
At this stage, the obvious choice for investors looking to play a long-term rebound for oil would be the two integrated oil companies in the S&P 500: Exxon Mobil Corp. /zigman2/quotes/204455864/composite XOM +2.16% and Chevron Corp. /zigman2/quotes/205871374/composite CVX -0.10% .
Here’s a list that includes the 10 largest energy-sector players by market value:
|Company||Ticker||Industry||Market value ($billion)||Total return - Aug. 25 through Nov. 2||Total return - 2015|
|Exxon Mobil Corp.||/zigman2/quotes/204455864/composite XOM||Integrated Oil||$355||24%||-5%|
|Chevron Corp.||/zigman2/quotes/205871374/composite CVX||Integrated Oil||$179||36%||-13%|
|SchlumbergerNV||/zigman2/quotes/201012972/composite SLB||Oilfield Services/ Equipment||$100||10%||-5%|
|ConocoPhillips||/zigman2/quotes/207605056/composite COP||Oil and Gas Production||$68||32%||-16%|
|Kinder Morgan Inc. Class P||/zigman2/quotes/208455654/composite KMI||Oil and Gas Pipelines||$59||-9%||-34%|
|Occidental Petroleum Corp.||/zigman2/quotes/207018272/composite OXY||Oil and Gas Production||$58||16%||-3%|
|Phillips 66||/zigman2/quotes/207448059/composite PSX||Oil Refining/ Marketing||$48||28%||29%|
|EOG Resources Inc.||/zigman2/quotes/204634330/composite EOG||Oil and Gas Production||$47||26%||-6%|
|Anadarko Petroleum Corp.||Oil and Gas Production||$34||6%||-17%|
|Valero Energy Corp.||/zigman2/quotes/200735463/composite VLO||Oil Refining/ Marketing||$34||18%||40%|
Despite gains for nine of the 10 energy companies since Aug. 25, all but two are still down for 2015, underlining just how early we are in the oil-price recovery cycle. West Texas crude oil rose 17% from Aug. 25 through Nov. 2, but was still down 13% this year.
Here are consensus price targets for the group, noting that these aren’t long-term forecasts:
|Company||Ticker||Closing price - Nov. 2||Consensus 12-month price target||Implied 12-month upside potential||Share of analysts rating the stock ‘buy’|
|Exxon Mobil Corp.||/zigman2/quotes/204455864/composite XOM||$85.28||$83.10||-3%||27%|
|Chevron Corp.||/zigman2/quotes/205871374/composite CVX||$94.96||$96.50||2%||40%|
|Kinder Morgan Inc. Class P||/zigman2/quotes/208455654/composite KMI||$26.62||$38.06||43%||70%|
|Occidental Petroleum Corp.||/zigman2/quotes/207018272/composite OXY||$75.58||$78.84||4%||62%|
|Phillips 66||/zigman2/quotes/207448059/composite PSX||$90.60||$93.60||3%||58%|
|EOG Resources Inc.||/zigman2/quotes/204634330/composite EOG||$86.07||$90.35||5%||69%|
|Anadarko Petroleum Corp.||$67.38||$84.84||26%||78%|
|Valero Energy Corp.||/zigman2/quotes/200735463/composite VLO||$68.03||$77.65||14%||77%|