Two of Wall Street’s most revered giants — Credit Suisse and Bank of America Merrill Lynch — are recommending investors buy oil and gas stocks now.They
believe oil prices have bottomed as producers scaled back output
significantly and when analysts are overwhelming bearish, the stock
market tends to go against the crowd.
Credit Suisse recommends overweighting the energy sector because of attractive valuations and earnings revisions
are starting to rebound off historical lows. What’s more, it was deeply
oversold on fourth quarter 2014 and the “least loved industry group
among large caps and one of least loved among small caps.”
“ Sell-side bullishness has collapsed and is at 10-year lows in small-cap (energy stocks)
,” Credit Suisse wrote in a report released April. 23. “(Energy is)
deeply out of favor on the buy side. The percent overweight in long-only
funds hit a new 10-year low in fourth-quarter 2014. Retail (investor) flows have been strong, but haven’t appeared extreme.”
Credit Suisse and Bank of America Merrill
Lynch are recommending investors buy oil and gas stocks now. They
believe oil prices have bottomed as producers scaled back output
significantly. Pictured here, an oil platform in the waters of the
Guanabara bay in Niteroi, Brazil, Tuesday, April 21, 2015. (AP Photo/Leo
Correa)
Oil firms are cutting back massively. They’ve announced plans to lay
off 100,000 workers globally. At least 91,000 people have already lost
their jobs, the Wall Street Journal reported.
Oil producers have taken half of their oil rigs offline in the past
year. Latest U.S. rig count hovered at about 950, down a from a peak of
1,900.
“The sheer scale of activity reduction, which portends a faster
decline in U.S. oil output for the balance of the year than will be
evident from first quarter 2015,” Doug Leggate, an analyst at Bank of
America Merrill Lynch, and his colleagues wrote in a client note April
20. “Finally we expect confirmation that costs reductions being realized
by the industry are coming faster and deeper than initial expectations
at the start of the year.
“On the whole this is a backward looking quarter that we believe will mark the bottom of this oil cycle.” First-quarter earnings are expected to drop 95% year over year and
48% quarter over quarter, according to BofA ML. West Texas Intermediate
Crude oil averaged $49 a barrel in first quarter, down 51% year over
year. Internationally traded Brent Crude averaged $54 a barrel in Q1,
down 50% year over year.
U.S. oil output is expected to drop by 55,000 barrels a day in May, BofA ML stated citing data from the Energy Information Administration. “With global demand estimates moving higher on the margin we maintain
our view that the market is running out of reasons to push oil lower,”
BofA ML stated.
Oil and gas ETF valuations and fundamentals. Source: Morningstar
Energy ETFs
Among all sector exchange traded funds, energy has been the only one to see significant buying lately. Energy equity ETFs had the largest four-week inflows at $2.9 billion, amounting to 11.6% of assets
, and the largest returns, +7.6%, in the four weeks ended April 21,
according to TrimTabs Investment Research, which tracks ETF and mutual
fund flows. Trading speculation on crude oil prices rose for a third
week straight.
iShares U.S. Oil Equipment & Services ETF (IEZ), Market Vectors
Oil Services (OIH) and SPDR S&P Oil & Gas Exploration and
Production (XOP) each vaulted 13% in the past four weeks, as of April
23. Energy Select Sector SPDR ETF (XLE) and Vanguard Energy ETF — the two
largest ETFs in their category by assets — jumped nearly 8% the past
month, far outperforming the SPDR S&P 500, which barely gained 1%
over the same period.
Energy ETF performance compared with S&P 500. Source: Morningstar
Investment Risks
Energy ETFs have yet to break above a key technical level at their 200-day moving averages. Energy stocks and the oil prices could be staging a counter-trend rally in a longer-term downtrend.
“There is more uncertainty as Saudi Arabia and Kuwait are clearly
adding to their production capacity,” said James Williams, president of
WTRG Economics in London, Arkansas, “That may be an indicator that they
are willing to endure relatively low prices for an extended period.”
Saudi Arabia’s oil rig count is at an all-time high of 125 as of March. Kuwait with 53 rigs is also at new high.
At 36, Abu Dhabi is only one rig short of its highest level going back
to mid-1983. As the big producers in the GCC (Gulf Cooperation Council),
they have spare capacity to produce even more oil more oil, thereby
lowering prices, Williams added.
“They did not reduce quotas over the objection of almost all of the
other members. Combined they are responsible for more than half of
OPEC’s production,” Williams added. “For the foreseeable future, oil
prices will be a GCC decision. If sanctions are lifted on Iran they may
not accommodate the additional oil from Iran with a cutback.”
Demand for oil hasn’t increased in response to cheap prices because of new technologies and environmental mandates , Forbes contributor Chip Register wrote
Thursday. Electric cars and increased fuel efficiency lowered demand in
developed countries. Emerging market demand has slowed along with
economic growth. Solar and other types of clean energy are increasingly
replacing fossil fuels in generating electricity. Trang Ho is the founder of Key Financial Media LLC, which produces content and thought leadership for financial advisors and investment strategists.
http://www.forbes.com/sites/trangho/2015/04/24/why-two-wall-street-giants-recommend-investors-buy-oil-and-gas-now/3/?ss=energy