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Better times ahead for lagging oil equities, Fundstrat says

  • Energy has been the S&P 500's worst performing sector this year (-11.5%), but Fundstrat's Thomas Lee offers three reasons that better times could be ahead.
  • 1. Lee says oil futures are moving into backwardation, which historically has been a sign that oil supply and demand fundamentals are moving into balance.
  • 2. Energy CDS and high-yield spreads have rallied YTD, reflecting improving fundamentals and spreads consistent with a stable backwardation oil market.
  • 3. Energy stocks have lagged severely and is the only sector where equity and CDS/high yield have diverged; past divergences favor a catch-up in the equity.
  • Among the stocks that passed Fundstrat's quality screen: Occidental Petroleum (NYSE:OXY), Exxon Mobil (NYSE:XOM), Apache (NYSE:APA) and ConocoPhillips (NYSE:COP).
  • Offshore drillers, however, are not favored by Wells Fargo's Judson Bailey, who says the likes of RIG, DO, RDC, ESV and NE will need to "continue to look for new avenues for cost reductions and efficiency that will help drop the cost curve across more offshore basins broadly."

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Occidental Petroleum Corporation
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