Salient to Investors:
The MSCI World Energy Index is down 9.6 percent in 2012, more than any other group, and is up 45 percent since the market bottom in 2009, less than any other industry with earnings tied to economic growth. U.S. energy stocks are at the cheapest levels relative to the Standard & Poor’s 500 Index since 2009. Growing consumption of energy has been met with even bigger gains in supply – U.S. crude inventories are the highest since 1990 and natural gas prices are down 38 percent in 12 months amid a glut spurred by hydraulic fracturing.
Energy stocks are trailing the S&P 500 by 43 percentage points since March 2009. In the bull market which ended in October, 2007, the industry surged 242 percent, better than any industry and more than double the full index, as earnings from oil and gas explorers and refiners climbed to 12.9 percent of overall S&P 500 profits in 2007 – now at 10.7 percent.
Energy companies are the only U.S. industry whose earnings forecasts have been revised from growth to contraction in 2012 – analysts estimate profits for 2012 will drop 5.8 percent versus 7.4 percent for the S&P 500.
Since 2000, energy shares lagged the S&P 500 for four months or more on two occasions, when the S&P 500 lost an averaging 12 percent over the next three months. When the industry last trailed for five months, ending in March 2010, the S&P 500 fell 16 percent from April through July.
Natural gas prices have dropped as much as 86 percent during the past four years due to advances in technology – horizontal drilling and hydraulic fracturing have become standard extraction techniques in America – prompting companies to try to offset falling profits by boosting drilling.
U.S. met 81 percent of its energy demand in 2011, the highest level since 1992,
Dean Junkans at Wells Fargo says we are getting energy independent as a country, pressuring oil prices and energy stocks.
The S&P 500 Energy Index traded at 5.33 times the price of oil in Q2 versus the average ratio of 7 in the past two decades. Fuel producers sell for 9.68 times 12-month earnings, 28 percent below S&P 500’s multiple of 13.5 and the widest discount since September 2009.
Jim Russell at U.S. Bank Wealth Management says the S&P 500 will meaningfully rise until the energy sector bottoms and begins to rise. Russell says energy stock valuations are cheap but the fundamentals have yet to bottom.
Joseph Quinlan at U.S. Trust fears energy will be weaker for longer since it is cyclically driven by weaker global demand and therefore weaker earnings outlook.
Jonathan Golub at UBS raised energy stocks to overweight from market weight on expected rebound in oil prices as macro concerns fade and prices become more closely driven by supply and demand.
Bloomberg’s median economist expects the world economy to grow 2.3 percent in 2012 and 2.8 percent in 2013.
Birinyi Associates says the S&P 500 is up 97 percent from its 12-year low on March 9, 2009: 111 percent excluding energy stocks
Stephen Wood at Russell Investments expects the market to continue to be challenged and volatile, says energy prices are a consequence, not a cause.