February 5, 2018 / 12:00 PM / a year ago

RPT-Energy stocks have room to build on solid start

 (Repeats with no changes)
    By Chuck Mikolajczak
    NEW YORK, Feb 5 (Reuters) - Energy stocks have got off to a
strong start this year and look poised to run further, fueled in
part by a rebound in oil prices, climbing U.S. production and
investors looking to take advantage of shares that could be a
bargain after a disappointing 2017.
    The S&P 500 energy index         fell 3.8 percent in 2017,
one of only two of its 11 major sectors to close out the year in
negative territory, even as the overall S&P 500        rallied
nearly 20 percent.   
    Those declines came despite a friendlier energy policy by
the administration of U.S. President Donald Trump, while
investors remained unconvinced a rise of more than 12 percent in
WTI crude oil        to the $60 a barrel by the end of the year
mark would hold.
    But a combination of factors, including global economic
growth, continued weakness in the dollar, the ability of OPEC to
keep production curbs in place and restraint on the part of U.S.
shale producers has helped lift WTI over the $65 mark and
convince investors the higher prices are now sustainable.
    Energy stocks climbed 3.8 percent in January before
stumbling nearly 6 percent this week as part of a broad market
    The higher prices have not only boosted the attractiveness
of energy stocks, but have bolstered the prospects for a rebound
in shale production. Output for U.S. oil is poised to climb
above 10 million barrels a day, which would top a record set in
1970 and cement the status of the United States as the No. 2
producer in the world. 
    To view a graphic on U.S. oil production, click here: tmsnrt.rs/2EtJgen
     With the energy sector in a more favorable light, investors
are looking to capitalize on stocks that remain cheap despite a
gain of more than 4 percent for the year. 
    "We are feeling good about the overall sector, we are
feeling good about the space," said Lisa Shalett, head of wealth
management investment resources and head of investment &
portfolio strategies at Morgan Stanley Wealth Management in New
    "It is supported both in terms of the fundamentals, the
fundamentals having more staying power and that staying power
translating into better earnings growth." 
    The relative performance of the S&P energy index has
generally tracked oil prices, but a gap emerged in 2017 as crude
prices recovered but shares in energy companies lagged,
indicating they are primed to catch up. 
    While the forward price to earnings ratio (PE) of the energy
index at nearly 24 is well above the 18.6 for the S&P 500, that
number is set to decrease as the sector has the second highest
percentage of upward estimate revisions of the major S&P groups
through Thursday morning, according to Thomson Reuters data. 
    In addition, the relative price-to-book ratio of the sector
is near a 10-year low at 0.6, suggesting it is undervalued. 
    Names such as Chesapeake Energy        , with a forward PE
under 5, and Cimarex Energy        , at a 15.6 forward PE, are
among the cheapest in the sector.  
    Also supporting oil prices has been the continued weakness
in the dollar       , which has helped demand. The greenback in
January suffered its worst monthly performance against a basket
of major currencies, down 3.25 percent, since March 2016. Demand
for crude is sapped by a stronger dollar, which is priced in the

    "There are several things going for it, it was unloved,
underowned and it already has been recovering fundamentally for
a while," said Jim Paulsen, chief investment strategist at The
Leuthold Group in Minneapolis. 
    "Now you have a dollar break to the downside which is
pushing crude to three-year highs and probably going to push
crude over $70 on WTI."
    Fund flows show investors have begun to take notice, with
S&P oil and gas exploration and production industry seeing a 4.3
percent increase in inflows over the prior week, according to
Credit Suisse data. 
    There could be some speed bumps for the sector, however.
Shale players and OPEC could lose their production discipline
and a strengthening U.S. economy could cause the dollar to
strengthen again and dampen oil prices. Crude has dipped 0.6
percent this week and is on track for its second weekly decline
in three. 
    "The stock market is bidding up some of these names beyond
where they really ought to be," said Stewart Glickman, energy
analyst at CFRA in New York.
    "Is earnings power going to improve - sure. It is moving in
the right direction but some of what has happened so far has
been currency driven and momentum driven and it is not going to
    Another headwind could be rising bond yields denting the
attractiveness of the sector for investors who look to dividend
    "Sometimes people buy these energy stocks as a yield play
because they tend to pay nice dividends," said JJ Kinahan, chief
market strategist at TD Ameritrade in Chicago. 
    "If the rates continue higher I wonder if crude will have to
break above $70 before we see the next surge in energy stocks."

 (Reporting by Chuck Mikolajczak; Editing by Alden Bentley and
Susan Thomas)
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