Wall Street Week Ahead: After blazing energy rally, investors check the
fuel gauge
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[December 05, 2020] By
Lewis Krauskopf
NEW YORK (Reuters) - Investors are gauging
how far a rally in beaten-down energy shares could run, as an expected
recovery for the coronavirus-hit economy clashes with skepticism about
the long-term prospects of fossil fuels.
Energy shares overall soared nearly 27% in November, leading the charge
among sectors expected to benefit from the broad economic revival
promised by encouraging developments for several vaccines against
COVID-19.
The longer term outlook for the sector, however, remains uncertain, as
companies throughout the oil and gas supply chain face challenges from
the increasing use of "green" energy sources such as wind and solar.
Another concern is resistance among fund managers to investing in fossil
fuel companies over environmental concerns.
"It's always hard to be extremely bullish on a sector that is likely in
secular decline, and the traditional fossil fuel sector is very likely
in secular decline," said Doug Cohen, a portfolio manager at Fiduciary
Trust International.
Coronavirus-related developments will continue to draw investor
attention next week, as a U.S. health advisory panel meets Thursday to
discuss whether to recommend emergency use authorization of a vaccine
developed by Pfizer Inc with German partner BioNTech SE.
The energy sector remains down 37% this year, even as a 13.5% rise has
sent the S&P 500 to fresh records. Declining oil prices have seen energy
stocks underperform the broad market since the Great Recession, and the
market value of energy companies has shrunk to 2.4% of the S&P 500, down
from over 15% in 2008, according to Refinitiv Datastream.
November rattled that trend, as the release of positive data from three
separate coronavirus vaccines from Pfizer, Moderna Inc and AstraZeneca
Plc sparked massive rallies in the shares of companies across the
sector.
Shares of oil majors Exxon Mobil Corp and Chevron Corp rose 17% and 25%,
respectively, while Occidental Petroleum Corp soared over 72% and Devon
Energy Corp surged nearly 57%.
"The notion of a vaccine being sometime around the corner gives some
hope that oil demand may recover," said Stewart Glickman, energy equity
analyst at CFRA Research, adding that energy shares will stay sensitive
to news about vaccines or coronavirus cases in the near-term.
Hopes of an economic rebound have drawn plenty of attention to the
battered sector. Goldman Sachs, Credit Suisse and Barclays in November
all upgraded their ratings on the energy sector to market-weight or
neutral.
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The Charging Bull or Wall Street Bull is pictured in the Manhattan
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The sector is "the poster child for deep value," Savita Subramanian, BofA Global
Research's head of U.S. equity and quantitative strategy, said during the firm's
2021 outlook event. The firm last month lifted its rating on the sector from
underweight to overweight.
The relatively high dividends of many energy stocks also could draw investors,
said Robert Pavlik, senior portfolio manager at Dakota Wealth Management.
Exxon's dividend yield is 9%, Chevron's is about 6% compared to a 2% yield for
the overall S&P 500.
Still, many are worried that energy stocks could weigh on portfolio performance
in the years ahead.
BMO Capital Markets rated the energy sector as underweight in its 2021 outlook,
saying that forecasts for oil consumption in 2021 are "subdued," with demand
likely to drop below levels in 2018 and 2019.
Longer-term trends are also pointing away from fossil fuels. Morgan Stanley
expects renewable energy sources to amount to about 45% of U.S. power generation
by 2035, more than double their current level.
So-called "sustainable" funds using environmental or social criteria to pick
stocks continued to draw money at a record pace in the United States during the
third quarter, taking in nearly $10 billion of net new deposits, according to
Morningstar.
Cabot Wealth Management, an investment advisor which manages $900 million, is
staying away from oil and gas companies, said Chief Investment Officer Rob Lutts.
Instead, the firm owns shares of companies it believes will benefit from a push
to alternative energy, such as solar firms and generator maker Generac Holdings
Inc.
"I am a big picture guy, and the big picture is not good for fossil fuel," Lutts
said.
(Reporting by Lewis Krauskopf; additional reporting by Scott DiSavino in New
York and Ross Kerber in Boston; Editing by Ira Iosebashvili and Richard Chang)
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