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 Firms including T. Rowe Price, Fidelity, and American Funds have
been adding shares of exploration and production companies that they
say have the most to gain from oil prices stabilizing. The price of
oil fell from $115 a barrel to $27.88 between June 2014 and January
of this year, yet is up more than 50 percent since hitting its low.
The number of funds buying shares of ConocoPhillips jumped 144
percent over the last three months compared with the previous
quarter, according to data from fund tracker Morningstar. Occidental
Petroleum Corp, meanwhile, had a 110 percent increase in new owners.
"The E&P companies have taken the brunt of the pain that I think
they will see in their business, so they will go into recovery
faster and first," said Bill Costello, a portfolio manager at
Westwood who has been adding to his exposure of the sector.
Some companies in the sector, such as Marathon Oil Corp and Devon
Energy Corp have plugged holes in their balance sheets by selling
assets and offering additional equity shares to investors, he said,
allowing them to withstand a prolonged era of relatively low oil
prices.
The rush of fund managers to buy exploration and production
companies after several quarters of shedding them is one reason why
the sector is up 9 percent for the year to date, outpacing both the
6.3 percent gain for energy stocks as a whole and the 1.8 percent
gain in the broad Standard & Poor's 500.
Overall, energy stocks remain the most underweight sector among fund
mangers, with the average large cap fund holding approximately 1
percent less of its portfolio in the sector than its weight in the
benchmark index, according to Lipper data.
Fund managers say that they are buying exploration and production
companies in part because they expect the oil glut to dwindle this
year as production halts begin to take effect, setting up for a
rally in revenue and earnings in 2017.
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"If you stop being negative on energy, you don't want to buy a safe
energy play, you want to buy a levered play," said Ernesto Ramos, a
portfolio manager at BMO Asset Management Company, referring to EOG
Resources, whose revenues are closely tied to oil prices. Shares of
the company are up 6.7 percent for the year to date, roughly half of
the 14.6 percent increase in oil over the same time.
Overall, earnings among energy companies in the S&P 500 are expected
to fall 66.5 percent in 2016, before gaining 203.1 percent in 2017,
according to Thomson Reuters data.
The prospects of a revenue and earnings rebound over the next two
years is attracting growth-focused fund managers who have typically
shied away from the energy sector.
Mike Pytosh, portfolio manager of the Voya MidCap Opportunities
fund, said that he shifted his energy exposure during the January
and February sell-off from refineries to exploration and production
companies that were the hardest hit.
"It certainly got to a point where it was oversold. You have to not
look at where the expectations are now, but where these companies
will be a year or two out," he said.
(Reporting by David Randall; editing by Linda Stern, Bernard Orr)
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