Gigem77

Negative Trend for Oil Exploration and Production Stocks

The market does not apply a large multiple to energy shares. For example, DVN is expected to make 12 bucks this year. But their PE has been 10 or below all year. Apply any reasonable multiple to 12 and look at today's price.

We have a 10 year uptrend in crude, which is still very much intact. But all of the punditry writing for seekingalpha is from daytraders trying to extrapolate a paradigm shift from 5 weeks of correction. The analysts revising earnings are getting twitchy also. I agree with Mr. Stolz, this is an great opportunity to buy.

The Market's View on Oil

What is the EPS range for your list? What PE did the market assign when oil was 85 in January and what was the PE when oil was 147? How does that range compare with today's price of 112? If the PE range is tight, and it is, then how does that affect your theory?

DVN is primarily a natural gas producer with expanding production. They have a forward PE of barely 6 today. When crude was 147 and natgas was nearly 14, their forward PE was about 7.5. You use a trailing PE of 10. That's not much difference.

A better hypothesis is that the market does not like energy shares and always assigns very low multiples. That's why many of the big energy companies are buying back their own shares.

Analysts estimate that DVN will make 12 dollars per share this year and 14 in '09. Assign any double digit PE you like and you get a price higher than the current one.

Too Soon to Re-enter Oil Stocks?

Thanks for the chart.

Demand for energy is not destroyed, it is subdued or supressed. As prices fall, demand comes back. The EIA data show that over the past 4 weeks demand for gasoline rose week over week. Equilibrium, minus a bunch of speculators, is going to be re-established north of 100 and possibly 110 in oil. Once that becomes apparent the market will take off the discount currently applied to that list of stocks.