Energy Stocks Primed For A Comeback?

Though last year wasn’t what you’d call hot for the U.S. Energy sector, and the first days of 2015 point to continued weakness in oil, investors are starting to look to when the sector might start to recover.

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 as a whole in the fourth quarter are down 19.6 percent, according to Thomson Reuters data; on October 1, the consensus estimate was for growth of 6.4 percent.

Because of the dramatic decline in energy stocks, analysts are now saying the investors are going to start looking for some incredible buying opportunities. Scott Wren, senior equity strategist at St. Louis-based Wells Fargo Advisors, commented on the prospect of buying energy stocks in the near future.

“It won’t surprise anyone to see profits fall, so if you have no exposure this is a good time to step in. The market is ready for bad news.”

One of those buyers is Michael Matousek, a head trader at U.S. Global Investors Inc., in San Antonio, who is getting in bed with some new energy companies “since these stocks are so cheap right now.”

Matousek noted that the pain wasn’t spread equally across the sector. Exxon Mobil fell 8.6 percent in 2014 while Chevron Corp lost about 10.2 percent. 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.

Linn Energy and Civeo Corp issued warnings this week, with both citing how lower prices have led to lower production.

Inverstors are seeing concerns about over-leveraged companies getting taken out by bigger ones. That’s already happened once, in November, when Halliburton Co. agreed to buy Baker Hughes Inc. for $35 billion. Michael Matousek commented on the phenomenon.

“You could start seeing [mergers and acquisitions] take place, since it makes sense for the bigger players to start gobbling up smaller companies. 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. But if and when they do, anyone holding the reigns to an energy stock could be in for some serious gains.

[Image via Malaysia Chronicle]