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Energy stocks "a good value" despite lower oil: S&P Capital IQ

Lawrence Lewitinn
Lawrence Lewitinn

The drop in oil prices has taken its toll on energy stocks. But one strategist is optimistic on the sector’s prospects.

Crude prices (CLV15.NYM) are approaching $40 per barrel, down from nearly $100 a year ago. Lower oil prices helped to bring down the S&P 500’s energy sector, which is down 17% since the beginning of 2015. Energy (^GSPE) is the worst performer of the 10 major sectors in the S&P 500 (^GSPC).

Throughout the year, analysts lowered their expectations on energy stocks because of oil’s decline. But when second-quarter earnings came out, energy companies soundly beat Wall Street’s expectations. The sector’s earnings were on average 30% higher than analysts’ estimates. Five of the top 10 companies with the largest earnings surprises were in the energy business.

Company

Ticker

Sector

Q2 EPS Estimate

Q2 EPS Actual

% Difference

Electronic Arts

EA

Information Technology

$0.022

$0.15

650%

Hudson City Bancorp

HCBK

Financials

$0.005

$0.07

600%

Apartment Investment & Management

AIV

Financials

$0.097

$0.39

290%

Noble Energy

NBL

Energy

$0.074

$0.26

271%

Pioneer Natural Resources

PXD

Energy

$0.294

$0.10

233%

EOG Resources

EOG

Energy

$0.106

$0.28

155%

Newfield Exploration

NFX

Energy

$0.193

$0.46

142%

Prologis

PLD

Financials

$0.118

$0.27

125%

Transocean

RIG

Energy

$0.514

$1.11

118%

First Solar

FSLR

Information Technology

$0.253

$0.52

108%

Source: S&P Capital IQ

“Simply, we didn’t expect them to earn as much,” said Erin Gibbs, equity chief investment office at S&P Investment Advisory Services. But crude prices went from $49 per barrel in early April to $59 per barrel by the end of June, making the situation slightly better for energy companies.

Nonetheless, Wall Street remains fairly negative on the energy and is forecasting a 65% decline in third-quarter earnings from the previous year and a 56% drop in earnings for 2015 compared to 2014.

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“I think this is actually over-pessimistic,” said Gibbs, who is responsible for over $16 billion in assets under advisory. “Energy companies can actually do better even with oil prices dropping recently. We’ve seen already stabilization in gas prices and we can see a little more stabilization in oil… They have the potential of easily beating earnings and doing better than we expect.”

Looking out to 2016, Gibbs anticipates 23% growth in energy earnings. Yet on a relative basis, the sector isn’t cheap. It is trading at roughly 26 times its expected next 12-months’ earnings compared to a multiple of 17 times for the overall S&P 500.

But Gibbs remains positive on energy.

“Taking into account we expect earnings to grow so much, particularly in the second half of 2016, they look a little more reasonable when you start looking at two years out, three years out,” she said. “I know it seems a little pricey right at this moment but ultimately it’s still a good value at this point."

 

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