The drop in oil prices has taken its toll on energy stocks. But one strategist is optimistic on the sector’s prospects.
Crude prices (CLV15.NYM) are approaching $40 per barrel, down from nearly $100 a year ago. Lower oil prices helped to bring down the S&P 500’s energy sector, which is down 17% since the beginning of 2015. Energy (^GSPE) is the worst performer of the 10 major sectors in the S&P 500 (^GSPC).
Throughout the year, analysts lowered their expectations on energy stocks because of oil’s decline. But when second-quarter earnings came out, energy companies soundly beat Wall Street’s expectations. The sector’s earnings were on average 30% higher than analysts’ estimates. Five of the top 10 companies with the largest earnings surprises were in the energy business.
Company
|
Ticker
|
Sector
|
Q2 EPS Estimate
|
Q2 EPS Actual
|
% Difference
|
Electronic Arts
|
EA
|
Information Technology
|
$0.022
|
$0.15
|
650%
|
Hudson City Bancorp
|
HCBK
|
Financials
|
$0.005
|
$0.07
|
600%
|
Apartment Investment & Management
|
AIV
|
Financials
|
$0.097
|
$0.39
|
290%
|
Noble Energy
|
NBL
|
Energy
|
$0.074
|
$0.26
|
271%
|
Pioneer Natural Resources
|
PXD
|
Energy
|
$0.294
|
$0.10
|
233%
|
EOG Resources
|
EOG
|
Energy
|
$0.106
|
$0.28
|
155%
|
Newfield Exploration
|
NFX
|
Energy
|
$0.193
|
$0.46
|
142%
|
Prologis
|
PLD
|
Financials
|
$0.118
|
$0.27
|
125%
|
Transocean
|
RIG
|
Energy
|
$0.514
|
$1.11
|
118%
|
First Solar
|
FSLR
|
Information Technology
|
$0.253
|
$0.52
|
108%
|
Source: S&P Capital IQ
“Simply, we didn’t expect them to earn as much,” said Erin Gibbs, equity chief investment office at S&P Investment Advisory Services. But crude prices went from $49 per barrel in early April to $59 per barrel by the end of June, making the situation slightly better for energy companies.
Nonetheless, Wall Street remains fairly negative on the energy and is forecasting a 65% decline in third-quarter earnings from the previous year and a 56% drop in earnings for 2015 compared to 2014.
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“I think this is actually over-pessimistic,” said Gibbs, who is responsible for over $16 billion in assets under advisory. “Energy companies can actually do better even with oil prices dropping recently. We’ve seen already stabilization in gas prices and we can see a little more stabilization in oil… They have the potential of easily beating earnings and doing better than we expect.”
Looking out to 2016, Gibbs anticipates 23% growth in energy earnings. Yet on a relative basis, the sector isn’t cheap. It is trading at roughly 26 times its expected next 12-months’ earnings compared to a multiple of 17 times for the overall S&P 500.
But Gibbs remains positive on energy.
“Taking into account we expect earnings to grow so much, particularly in the second half of 2016, they look a little more reasonable when you start looking at two years out, three years out,” she said. “I know it seems a little pricey right at this moment but ultimately it’s still a good value at this point."
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