The S&P 500 Energy Sector index has outperformed the S&P 500 in nine of the past 16 years. The sector also beat the “500″ in 2004 and 2005, as well as for the three-year stretch of 2000-2002. So the question arises: Is there an upswing left to energy?
S&P’s Investment Policy Committee still believes investors should overweight their exposure to the S&P Energy sector, based on a combination of attractive valuations and high earnings visibility amidst a slowing economic environment. We therefore recommend investors take advantage of recent price weakness to add to holdings.
Long stretches of market outperformance are certainly not unheard of for energy stocks. In fact, the S&P Integrated Oil & Gas Sub-Industry index, which currently represents nearly 60% of the weighting of the S&P Energy sector, bested the “500″ nine straight years from 1972-1980.
S&P currently has a positive fundamental outlook on the Energy sector, which is projected to post an 11% year-over-year increase in operating earnings this year. Despite solid estimated per-share earnings growth, the sector sports the lowest P/E in the S&P 500, trading at 10.4 times 2006 estimated per-share earnings, versus 14.9 times for the broader market.
The sector also boasts the highest average S&P STARS ranking of all 10 S&P sectors, based on analyst optimism regarding high earnings visibility and valuation levels.
Mark Arbeter, S&P’s chief technical strategist, said that “crude oil prices have paused after running up near the Katrina highs of $70 a barrel. We believe that oil prices will find strong support in the $62 to $64 zone, and are setting up for another run at all-time highs. A close above the $70 level would be very bullish technically and would set-up a run to the $80 area, in our opinion. The S&P Energy Index recently hit another all-time high. After some consolidation, we think additional gains are likely.”
The best performing sub-industry of the S&P 500 Energy sector year-to-date is Oil and Gas Equipment and Services, which has risen 19% vs. a 9% gain for the broader sector. S&P senior equity industry analyst Stewart Glickman remains positive on the group based on “continued high levels of capital spending by oil and gas producers, which should bolster demand for services, including production optimization and other technologically advanced services.”
Glickman adds that over the longer term, “we expect demand for drilling services to increase. In the U.S., we believe high field depletion rates and increasing demand for natural gas will continue to support healthy drilling activity. Overseas, we expect higher spending by major oil companies, as well as state-owned oil companies, to be the main growth driver for drilling, as they continue to search for low-cost drilling opportunities, mainly in new regions around the world, with greater emphasis on the deepwater.”
One way to play energy is the S&P Select Sector Energy SPDR (XLE), an exchange-traded fund (ETF) which primarily invests in companies engaged in the development and production of crude oil and natural gas, as well as drilling and other energy-related services. As of Dec. 31, 2005, the ETF comprised 29 companies, including Exxon Mobil (XOM), Chevron Corp. (CVX) and ConocoPhillips (COP). For the one-year period through Jan. 31, 2006, this ETF gained 55.17%, versus a 10.38% return for the S&P 500 Index. Over the three-year period, the ETF climbed 40.63% (annualized), compared with a 16.40% rise for the Index.InvestmentAdvisor.com has more mutual fund news from Standard & Poor’s available here.