Energy
sector may prove expensive even if results beat
estimates
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[July 24, 2015]
By Sinead Carew
(Reuters) - The battered energy sector may
begin to brighten a little as companies report second-quarter results,
but barring a big increase in the price of oil, the sector won't be able
to sustain even current share prices going forward, analysts and
investors say.
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Oil prices have fallen at a much steeper clip than energy shares in
the 13 months since June 23, 2014 - when oil prices hit a nine-month
peak - keeping valuations high even as share prices have plunged.
The S&P energy sector <.SPNY> has fallen about 30 percent since then
while oil prices have fallen 50 percent.
With the energy sector's second-quarter earnings seen doing better
than the prevailing consensus forecast for a decline of almost 59
percent from the year-ago quarter, according to a Thomson Reuters
analysis, shares could get a benefit. The S&P energy sector's price
to earnings ratio is around 23 compared with 17 for the S&P 500.
But the S&P energy subsector of exploration and production companies
<.SPLRCOILP> is at its most expensive on a price-earnings basis
since Reuters started tracking the data in 1995. Consensus estimates
for oil producer earnings this year imply an average crude oil price
of $65.19 a barrel in 2016, says Fadel Gheit, an analyst with
Oppenheimer & Co.
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Oil recently has been selling for around $48 a barrel, and oil
futures trading is pointing at a 2016 average price of around $54.
Gheit says roughly half of U.S. oil producers could run into
financial trouble unless oil surpasses $70 a barrel.
"The outlook for energy shares looks somewhat challenging for now as
the oil price implied in the shares is higher than current spot
prices," said Stephen Clark, senior vice president, portfolio
manager, Standard Life Investments, in Boston, a long investor which
is mostly on the sidelines for oil. "There is already some degree of
oil price recovery baked in."
The energy sector overall is expected to report earnings 3.5 percent
better than consensus estimates, according to Thomson Reuters data,
which puts more weight on forecasts from analysts with the most
accurate track record. But there may be some negative surprises as
well.
In next week's reports Chevron Corp <CVX.N>, Exxon Mobil <XOM.N> and
Murphy Oil <MUR.N> are seen beating consensus estimates while
ConocoPhillips <COP.N>, Range Resources <RRC.N> and Occidental
Petroleum <OXY.N> could miss consensus, according to Thomson Reuters
data.
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To be sure, commodities traders and analysts may both be
underestimating future oil prices. Investors have been encouraged by
signs of strong demand in the summer driving season and cuts to
capital expenditures by many energy firms, allowing more room for
profitability on those sales.
"There could be a trade higher for both oil prices and the energy
stocks later this year driven by falling U.S. production and
generally healthy demand," said Tim Parker, oil analyst and
portfolio manager at T. Rowe Price.
"I’m less confident in the coming years with the cross currents of
Iran and the potential for global economic slowing."
Exploration and production share prices remain especially costly.
Even after falling 25 percent since April, the subsector's P/E sits
at about 100 - dramatically higher than the S&P 500. The previous
peak for the subsector was under 70 in 1995.
"It will be a day of reckoning as we get closer to the end of this
year and people realize that average prices are not likely to match
current expectations," said Gheit.
"I'm not willing to make bets that there'll be disruption of oil
flow from the Middle East or elsewhere that will give us $70 oil."
(Reporting by Sinead Carew; Additional reporting by Rodrigo Campos,
Saqib Ahmed and Catherine Ngai in New York, Noel Randewich in San
Francisco; Editing by Linda Stern and Leslie Adler)
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