US fund managers remain positive on energy stocks, expecting oil prices will be sustained at around...
US fund managers remain positive on energy stocks, expecting oil prices will be sustained at around $25 and that company earnings will continue to improve.
Despite the recent announcement by Saudi Arabia that it will pump an extra 500,000 barrels of crude oil into the market daily, fund managers do not expect this to have a significant impact on the market.
Both Newton and Scottish Equitable remain positive on the sector and do not expect the extra volume will have a significant impact in terms of the global output.
The Saudi Arabian decision will cause short-term effects and lead to volatile pricing, but this is not expected to be significant.
Trish Bridson, US fund manager at Newton, expects the oil sector to deliver the strongest performance, across the whole US market, during 2000.
Bridson says: "The oil price has been going up for a significant amount of time but prior to the last month or two, the view was generally held that prices of around $30 were just a spike and it would fall again.
"I think now the common view is that Opec will keep oil maybe in the $25 range, and the oil stocks are just not pricing in anywhere near this level."
Elaine Heaton-Armstrong, US fund manager at Scottish Equitable, says: "We are in an environment where there is a longer-than-normal period of opportunity for profitable earnings. The higher price is helping all companies, but earnings should really start to improve given that the sector has cut costs after coming out of a bad patch, whereby the oil price plummeted to $10 a barrel early last year."
Although Heaton-Armstrong does not expect the oil price to linger around the $30 mark indefinitely, she does not expect it to fall to the lows of last year.
Nevertheless, she believes there will be some near term volatility in the market, related to commodity prices.
She adds: "Longer term however people will start focusing on earnings and more and more reports will show a pick up in earnings."
She says some stocks are expensive, for example, Schlumberger is trading at historical highs of around 60 times this years earnings and 37 times next years earnings.
One notable company in the sector, Heaton-Armstrong says, is Conoco.
She likes this integrated oil stock as it lags behind the more well-known and liquid names, but is likely to perform well. She expects Conoco still has a 30-40% upside because investors, until now, have been focusing on the bigger stocks.
Bridson says she is playing energy on two fronts.
She says: "We have a couple of big international oils. Exxon Mobile is the main one, but we also have a small position in Texaco.
"We have a position in a couple of oil service companies, like Schlumberger. They have been a bit slower to react, partly because the companies have been much more cautious this time in increasing their spending.
"What happens normally when the oil prices go up is the big oil companies start spending to increase the supply of oil and the oil price goes down again. They have smartened up this time and they are being a bit more conservative. Still, there is generally a need for more oil on a global basis so we think the oil service companies have a little bit further to go so we are positive in this area."
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