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 Crude oil prices fell 42 percent in the fourth quarter. The fallout
on corporate bottom lines isn't yet known, but forecasts suggest it
will be severe. Energy sector earnings are seen down 19.6 percent in
the fourth quarter, according to Thomson Reuters data; on Oct. 1,
the consensus estimate was for growth of 6.4 percent.
While the flip in expectations is bearish, analysts say the dramatic
decline in the stocks means some investors are going to start
looking for buying opportunities.
"It won't surprise anyone to see profits fall, so if you have no
exposure this is a good time to step in," said Scott Wren, senior
equity strategist at St. Louis-based Wells Fargo Advisors, which has
an "equal weight" rating on the sector. "The market is ready for bad
news."
Investors didn't flee the group even as it fell in the last three
months of the year. A total of 85 energy sector funds tracked by
Lipper, a Thomson Reuters company, shows five consecutive weeks of
inflows dating to late November, with more than $3.5 billion in
inflows.
One of the buyers is Michael Matousek, head trader at U.S. Global
Investors Inc in San Antonio, who said he was adding exposure "since
these stocks are so cheap right now."
Matousek noted that the pain wasn't spread equally across the
sector. Denbury Resources and Noble Corp were two of the worst
performers in the S&P 500 last year, losing half their value, while
big integrated oil and gas firms saw less severe share price
declines. Exxon Mobil fell 8.6 percent in 2014 while Chevron Corp
lost about 10.2 percent.
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Linn Energy and Civeo Corp issued warnings this week, with both
citing how lower prices have led to lower production.
Investors seeing the decline in share prices and concern about
overleveraged companies could bet on weaker players getting taken
out by bigger companies. The energy sector has already seen one big
deal, in November, when Halliburton Co agreed to buy Baker Hughes
Inc for $35 billion.
"You could start seeing M&A take place, since it makes sense for the
bigger players to start gobbling up smaller companies," Matousek
said. "They've got plenty of cash on hand and can use it to grow if
they're not growing organically."
While energy shares are viewed as one of the market's bigger
bargains, that comes with bigger risks. The supply glut that has
devastated oil prices shows no signs of stabilizing.
"Certain areas of the sector have come down enough," said Joshua
Brown, vice president of investments at Fusion Analytics in New
York. "The big high-dividend companies, those probably have, but the
smaller companies? They haven't seen enough pain."
(Editing by Nick Zieminski)
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