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Portfolio > ETFs > Broad Market

Energy Stocks: Still Room to Run?

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A quick review of West Texas Intermediate (WTI) crude oil’s spot market price over the past 12 months reveals a quiet market, with the price per barrel starting and finishing in the upper-$40 range. In reality, it was an extremely volatile period with spot WTI falling below $30 in January 2016 before rallying to over $50 by June.

Last last week, for instance, it traded near $50.60 on Thursday but ended the week just under $50. Prices have been influenced by declining inventory and OPEC’s recent move to reduce supply.

Performances among equity-energy funds tracked by Morningstar through Sept. 30 reflect the pattern of gyrations in the sector.

The one-year average return earned by investors who rode out the price swings was 14.5%. But investors buying in early-2016 had a year-to-date return of 20.3%, reflecting their savvy market timing (or good luck) in catching the bottom.

Price swings have moderated since mid-summer, although the markets are still subject to volatility spikes from speculation about OPEC, supply disruptions in politically unstable countries and other causes.

Given the run-up in prices since the early-year lows, should investors consider getting into energy funds, and if so, which sectors appear to offer the best prospects?

Not Too Late

Scott Colyer, CEO and chief investment officer of Advisors Asset Management in Monument, Colorado, views the recent price volatility as the bottoming of a long-duration commodity cycle.

Lower prices lead to reduced production and investment, which in turn causes a drawdown of existing stocks. That tightening moves prices higher, and he believes the market has reached that point with crude oil.

However, the problem with WTI at or around $48 is that the price is still too low to boost exploration and production significantly, Colyer says. The U.S. rig count has recovered to about 400, after falling from 1,500 to a low of 300; it’s still far below previous activity.

Nonetheless, Colyer is bullish on energy for several reasons. First, insider buying among corporate officers and directors has been substantial for the past six months or so.

Among the energy sectors, he explains, the integrated firms were among the first to bottom out, and thus they are attractive from a multi-year investment perspective.

“I think you have a lot of opportunity left in the [exploration and production] sector, especially for those companies that have managed to successfully recapitalize and fixed their balance sheets,” he stated.

“Many of them have done bond exchanges. Many of them have recapitalized by accepting outside capital but there are assets for sale for cheap and those who have successfully recapitalized will be able to take advantage and buy those,” Colyer explained.

Other Players

The performance of other energy sectors, such as the service and equipment companies and offshore drillers, will likely move along in response to changes in rig counts and demand for support services. In contrast, refiners underperform when prices are rising, because the spread between their cost of crude oil and the price they receive for their products tends to narrow.

Overall, though, the outlook for energy stocks is good.

“I think the days of being bearish on energy are behind us. They’re not in front of us. You should be probably bullish and, quite frankly, probably very bullish,” Colyer said.


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