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Energy Sector - The Last Value Play

Jul. 19, 2017 8:58 AM ETTS, VREYF, APA, OXY, XLE2 Comments
Andrea Bernasconi profile picture
Andrea Bernasconi
113 Followers

Summary

  • The sector has both intrinsic and relative value.
  • Energy companies have better operational and financial health than in the past and can be profitable at lower oil prices.
  • Oil-led underperformance has been followed by sharp rallies in the sector. This time might be even stronger given the improved fundamentals and the lack of cheap opportunities in other sectors.
  • Best ideas: Apache, Occidental Petroleum, Torc Oil & Gas, Tenaris.

It's certainly a difficult time to think about investing in the Energy sector with very high volatility, the oil price under pressure, and very little support from sentiment. Testament to that is the weight of the Energy sector in the S&P 500 Index, which has dropped to a low of 5.95% as of today, well below the top reached in 2008 when it was above 13%:

Having a clear view of the direction of the price of crude oil would be clearly extremely helpful in deciding how to invest in the sector. Some may argue that it is actually the only tool needed. In principle, this is true, but in this particular time, we think that it is both extremely controversial to assess future prices with reasonable confidence and less relevant to the stock price of energy companies. We are going to list several factors that should sustain WTI prices, as well as several that show downward pressure, but what is important to notice is that the sector has enough intrinsic value to shine on its own (both in a relative and absolute way), almost regardless (within reasonable limits) of the commodity price environment.

Reasons to be bearish (or why oil price is capped):

  • Despite the remarkable compliance of OPEC countries, crude stock levels in the USA remain exceptionally high. What will happen to oil prices once these inventories hit the market? It's going to take longer than expected to work this excess out, but one should not forget that the level of inventories ex-USA (and ex-OECD) is much less transparent and might be below what is commonly thought. Moreover, while the absolute level is high, the data is less worrisome once it is considered in relationship with the dramatic increase in production. Indeed, the Department of Energy (DOE) considers as inventories also the crude in

This article was written by

Andrea Bernasconi profile picture
113 Followers
Equity Portfolio Manager with a strong Value bias. Currently moving to smaller cap names and mainly interested in cyclical companies that can re-rate. Particularly attracted by the mining and oil sector.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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TS--
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VREYF--
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APA--
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OXY--
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XLE--
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