Energy company stocks in the U.S. are trading near the lowest prices relative to earnings since the 1980s, spurring some of the biggest money managers to bet on a rebound.
``The stocks unquestionably are cheap,'' said Robert Doll, chief investment officer of global equities at BlackRock Inc. in New York, who helps oversee about $1 trillion. ``This is an interesting opportunity to add to positions.''
Shares of U.S. energy companies cost 28 percent less than the Standard & Poor's 500 Index, based on estimated earnings, according to data compiled by Morgan Stanley. That's near the lowest since November 1982. In Europe, they're the cheapest in four years, data from FactSet Research Systems Inc. in London show. A drop in crude-oil prices to the lowest since May 2005 and anticipation of slowing profit growth hurt the shares, which had the biggest gains during the four-year rally in U.S. stocks. Oil and gas companies are the worst performers in 2007 of the 10 industry groups in Morgan Stanley Capital International's World Index, falling 3.6 percent.
Exxon Mobil Corp., the world's largest energy producer, is among companies scheduled to report fourth-quarter earnings this week. ConocoPhillips, the biggest U.S. gas producer, last week posted its first profit decline in four years.
Analysts expect the group to account for most of the biggest gains among S&P 500 stocks this year, price estimates compiled by Bloomberg show. The earnings reports this week may help determine whether growth is strong enough to spur a rebound.
Earnings Reports
Exxon is scheduled to announce results for the fourth quarter along with Marathon Oil Corp., the fourth-largest U.S. oil company, Valero Energy Corp., the biggest U.S. refiner, and Royal Dutch Shell Plc, Europe's largest oil company by market value.
Last week, a gauge of energy stocks in the MSCI World rose 0.4 percent, while the broader index declined 0.4 percent. Oil had its biggest surge since 2005 on Jan. 23 as the U.S. said it will double the size of the nation's Strategic Petroleum Reserve.
Oil had tumbled 34 percent before last week from a record $78.40 a barrel in July, spurring analysts to cut earnings forecasts for energy producers. Mild weather in the U.S., the world's biggest oil user, sent crude as low as $49.90 on Jan. 18. The March contract ended last week at $55.42.
Analysts estimate profits at S&P 500 oil and gas companies declined 11 percent last quarter, according to data compiled by Bloomberg. The projection compares with 0.9 percent growth forecast at the start of October. Fourth-quarter profit climbed 8.9 percent overall for the 196 index members that have reported.
`Not a Fad'
Some investors argue the slump in oil prices will be short- lived, providing a chance to buy energy shares cheaply.
``Oil is a good business, it's not a fad,'' said Scott Black, who oversees $1.7 billion as president of Delphi Management Inc. in Boston. ``You still make a lot of money at $51 a barrel, and in fact, I still think oil's going back to between $60 and $65 a barrel this year.''
Black is a so-called value investor, who favors stocks selling at low prices relative to earnings and other measures, and has bought Devon Energy Corp. and Apache Corp. shares.
Doll has been buying more shares of Exxon, Marathon Oil, and Chevron Corp., the second-biggest U.S. oil company.
In four previous cases since 1976 when the discount was at least 26 percent, the group climbed an average of 25 percent in the next 12 months, Morgan Stanley's calculations show. The S&P 500 gained 7.7 percent on average during the same four periods.
Primed for Rally?
``We're probably at that stage where the stocks have gone down as far as they can on the price of oil,'' said Craig Hodges, who manages about $1.2 billion at Hodges Capital Management Inc. in Dallas. ``The stocks are still trading at low multiples and they're not overpriced.''
The Hodges Fund, which has beaten 98 percent of its peers during the past five years, increased its weighting in oil and gas producers to 20 percent from 19 percent at the end of September. That's double the group's value in the S&P 500.
In Europe, energy stocks are valued at about a 32 percent discount to the Dow Jones Stoxx 600 Index based on projected earnings, according to data this month from FactSet. The gap is the widest since February 2003.
The Stoxx 600's energy index has fallen 2.8 percent this year, the steepest drop among the Stoxx 600's 18 groups. From the start of March 2003 through the end of 2006, the industry gauge doubled as the pan-European index added 71 percent.
Asian Losses
Asian oil and gas stocks are also becoming cheaper on a price-earnings basis. The MSCI Asia-Pacific Energy Index is valued at 40 percent less than the MSCI Asia-Pacific Index, compared with 34 percent in July. The group has fallen 3.4 percent this year after surging 31 percent in 2006.
PetroChina Co., the largest Asian oil company, has been the group's worst performer. The stock has dropped 13 percent this year after surging 74 percent in 2006. Berkshire Hathaway Inc., headed by billionaire investor Warren Buffett, is the biggest outside shareholder.
Oil's drop in January has weighed on earnings expectations for 2007. Analysts forecast profit at U.S. energy companies will drop 0.6 percent, the second-biggest decline among the 10 groups in the S&P 500, after rising 20 percent last year.
Fourth-quarter net income at Exxon probably fell to $1.52 a share from $1.65 in the year-earlier period, according to analysts surveyed by Bloomberg. Marathon may report profit dropped to $2.28 per share from $3.61 a year ago.
`Conservative' Prices
``It's appropriate for investors to price the stocks conservatively,'' said John Carey, who runs the $7.9 billion Pioneer Fund in Boston. His energy allocation has fallen to 7.8 percent from 8.5 percent at the end of November. ``Just because the multiple is low doesn't mean the stock is cheap. It all depends on what the future earnings are.''
Delphi's Black isn't alone in expecting crude prices to rebound. Jim Rogers, who predicted the start of the rally in commodities in 1999, said this month in Tokyo that the slide in oil is a ``correction'' before prices head above $100 a barrel.
Hedge-fund manager Boone Pickens, who gained a spot on Forbes Magazine's list of richest Americans by betting energy prices would rise, said in an interview this month that he's sticking to his forecast that oil will average $70 in 2007.
Analysts are also bullish on oil and gas companies within the S&P 500. Of the 20 stocks in the index that they expect to have the biggest advances, 14 were energy producers, Bloomberg data showed.
`Fairly Favorable'
Price forecasts for these 14 stocks are 38 percent higher than the current market prices on average, the data showed. The estimates are for six months to 18 months.
Earnings at some energy companies provide reason to be optimistic. Schlumberger Ltd. on Jan. 19 said fourth-quarter profit soared 71 percent, exceeding analysts' estimates, and forecast ``significant growth'' in 2007.
Shares of the world's largest oilfield-services provider added 5.4 percent on the day of the earnings report. Yet they are trading at an eight-year low relative to forecast profit.
For BlackRock's Doll, investing in oil companies is worth the risk that there won't be many reports like Schlumberger's.
``It's a risk/return sort of trade-off, and this one is fairly favorable,'' he said. Earnings at some energy companies are ``probably going to be a little bit on the sloppy side. But we think the stocks are already largely discounting that.''
``The stocks unquestionably are cheap,'' said Robert Doll, chief investment officer of global equities at BlackRock Inc. in New York, who helps oversee about $1 trillion. ``This is an interesting opportunity to add to positions.''
Shares of U.S. energy companies cost 28 percent less than the Standard & Poor's 500 Index, based on estimated earnings, according to data compiled by Morgan Stanley. That's near the lowest since November 1982. In Europe, they're the cheapest in four years, data from FactSet Research Systems Inc. in London show. A drop in crude-oil prices to the lowest since May 2005 and anticipation of slowing profit growth hurt the shares, which had the biggest gains during the four-year rally in U.S. stocks. Oil and gas companies are the worst performers in 2007 of the 10 industry groups in Morgan Stanley Capital International's World Index, falling 3.6 percent.
Exxon Mobil Corp., the world's largest energy producer, is among companies scheduled to report fourth-quarter earnings this week. ConocoPhillips, the biggest U.S. gas producer, last week posted its first profit decline in four years.
Analysts expect the group to account for most of the biggest gains among S&P 500 stocks this year, price estimates compiled by Bloomberg show. The earnings reports this week may help determine whether growth is strong enough to spur a rebound.
Earnings Reports
Exxon is scheduled to announce results for the fourth quarter along with Marathon Oil Corp., the fourth-largest U.S. oil company, Valero Energy Corp., the biggest U.S. refiner, and Royal Dutch Shell Plc, Europe's largest oil company by market value.
Last week, a gauge of energy stocks in the MSCI World rose 0.4 percent, while the broader index declined 0.4 percent. Oil had its biggest surge since 2005 on Jan. 23 as the U.S. said it will double the size of the nation's Strategic Petroleum Reserve.
Oil had tumbled 34 percent before last week from a record $78.40 a barrel in July, spurring analysts to cut earnings forecasts for energy producers. Mild weather in the U.S., the world's biggest oil user, sent crude as low as $49.90 on Jan. 18. The March contract ended last week at $55.42.
Analysts estimate profits at S&P 500 oil and gas companies declined 11 percent last quarter, according to data compiled by Bloomberg. The projection compares with 0.9 percent growth forecast at the start of October. Fourth-quarter profit climbed 8.9 percent overall for the 196 index members that have reported.
`Not a Fad'
Some investors argue the slump in oil prices will be short- lived, providing a chance to buy energy shares cheaply.
``Oil is a good business, it's not a fad,'' said Scott Black, who oversees $1.7 billion as president of Delphi Management Inc. in Boston. ``You still make a lot of money at $51 a barrel, and in fact, I still think oil's going back to between $60 and $65 a barrel this year.''
Black is a so-called value investor, who favors stocks selling at low prices relative to earnings and other measures, and has bought Devon Energy Corp. and Apache Corp. shares.
Doll has been buying more shares of Exxon, Marathon Oil, and Chevron Corp., the second-biggest U.S. oil company.
In four previous cases since 1976 when the discount was at least 26 percent, the group climbed an average of 25 percent in the next 12 months, Morgan Stanley's calculations show. The S&P 500 gained 7.7 percent on average during the same four periods.
Primed for Rally?
``We're probably at that stage where the stocks have gone down as far as they can on the price of oil,'' said Craig Hodges, who manages about $1.2 billion at Hodges Capital Management Inc. in Dallas. ``The stocks are still trading at low multiples and they're not overpriced.''
The Hodges Fund, which has beaten 98 percent of its peers during the past five years, increased its weighting in oil and gas producers to 20 percent from 19 percent at the end of September. That's double the group's value in the S&P 500.
In Europe, energy stocks are valued at about a 32 percent discount to the Dow Jones Stoxx 600 Index based on projected earnings, according to data this month from FactSet. The gap is the widest since February 2003.
The Stoxx 600's energy index has fallen 2.8 percent this year, the steepest drop among the Stoxx 600's 18 groups. From the start of March 2003 through the end of 2006, the industry gauge doubled as the pan-European index added 71 percent.
Asian Losses
Asian oil and gas stocks are also becoming cheaper on a price-earnings basis. The MSCI Asia-Pacific Energy Index is valued at 40 percent less than the MSCI Asia-Pacific Index, compared with 34 percent in July. The group has fallen 3.4 percent this year after surging 31 percent in 2006.
PetroChina Co., the largest Asian oil company, has been the group's worst performer. The stock has dropped 13 percent this year after surging 74 percent in 2006. Berkshire Hathaway Inc., headed by billionaire investor Warren Buffett, is the biggest outside shareholder.
Oil's drop in January has weighed on earnings expectations for 2007. Analysts forecast profit at U.S. energy companies will drop 0.6 percent, the second-biggest decline among the 10 groups in the S&P 500, after rising 20 percent last year.
Fourth-quarter net income at Exxon probably fell to $1.52 a share from $1.65 in the year-earlier period, according to analysts surveyed by Bloomberg. Marathon may report profit dropped to $2.28 per share from $3.61 a year ago.
`Conservative' Prices
``It's appropriate for investors to price the stocks conservatively,'' said John Carey, who runs the $7.9 billion Pioneer Fund in Boston. His energy allocation has fallen to 7.8 percent from 8.5 percent at the end of November. ``Just because the multiple is low doesn't mean the stock is cheap. It all depends on what the future earnings are.''
Delphi's Black isn't alone in expecting crude prices to rebound. Jim Rogers, who predicted the start of the rally in commodities in 1999, said this month in Tokyo that the slide in oil is a ``correction'' before prices head above $100 a barrel.
Hedge-fund manager Boone Pickens, who gained a spot on Forbes Magazine's list of richest Americans by betting energy prices would rise, said in an interview this month that he's sticking to his forecast that oil will average $70 in 2007.
Analysts are also bullish on oil and gas companies within the S&P 500. Of the 20 stocks in the index that they expect to have the biggest advances, 14 were energy producers, Bloomberg data showed.
`Fairly Favorable'
Price forecasts for these 14 stocks are 38 percent higher than the current market prices on average, the data showed. The estimates are for six months to 18 months.
Earnings at some energy companies provide reason to be optimistic. Schlumberger Ltd. on Jan. 19 said fourth-quarter profit soared 71 percent, exceeding analysts' estimates, and forecast ``significant growth'' in 2007.
Shares of the world's largest oilfield-services provider added 5.4 percent on the day of the earnings report. Yet they are trading at an eight-year low relative to forecast profit.
For BlackRock's Doll, investing in oil companies is worth the risk that there won't be many reports like Schlumberger's.
``It's a risk/return sort of trade-off, and this one is fairly favorable,'' he said. Earnings at some energy companies are ``probably going to be a little bit on the sloppy side. But we think the stocks are already largely discounting that.''
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