Sector Still Has Plenty Of Energy
You’d never know it by looking at the S&P 1500 Energy Sector Index, but most energy stocks are doing fine this year.
The index had risen just 1% as of Sept. 1, well below the gains of most market sectors. However, the average S&P 1500 energy stock is up 21%.
How do we reconcile those numbers? Consider two key facts about the energy sector:
First, seven integrated oil companies represent 58% of the energy index’s stock-market value. Those seven companies average year-to-date price gains of 2%. Four of the seven, including the three largest, have declined this year. Poor performance from the largest oil companies weighs on the capitalization-weighted index, offsetting strong moves from many smaller stocks.
Second, oil prices have rallied sharply in recent months. The current spot price of $69.97 per barrel is up 79% from the February average price of $39.09 per barrel. Natural-gas prices have not shared in the fun, but oil is more important to the sector, and energy stocks tend to rise when oil prices increase. Natural-gas use is growing rapidly, but it accounted for about one-fourth of global energy consumption last year.
In the following paragraphs, we present four reasons for continued optimism about select energy stocks:
• On average, energy companies in the S&P 1500 Index earn a Quadrix® Overall score of 60. The equipment & services and drilling industries, home to our top energy picks, average even higher scores. The Forecasts currently recommends six energy stocks for purchase, all of which are listed in the table below.
• The futures market projects oil prices will rise gradually over the next year and reach $75 per barrel in late 2010. Futures prices reflect a 99% rise in natural-gas prices by the end of this year, with another 39% growth in 2010. Higher oil and gas prices are a positive for most energy stocks.
• More than 60% of the S&P 500 Index’s 39 energy stocks saw consensus profit estimates for the next fiscal year rise over the last eight weeks. This momentum suggests analysts are becoming more confident about the sustainability of higher oil
• Recent results from Oceaneering International ($52; OII) and other oilfield suppliers suggest spending on exploration and production remains decent, particularly for deepwater projects. All three of our Buy-rated energy stocks have substantial interests in deepwater production.