The energy sector is coming back into favour amid the volatility in technology stocks. Britannic As...
The energy sector is coming back into favour amid the volatility in technology stocks.
Britannic Asset Management is positive on energy stocks, where it has 6.5% invested, versus 5.3% in the S&P 500 index.
The energy sector is up by 1% relative to the broader US market.
Most of that outperformance has been achieved in the oil services, exploration and production companies, says Douglas Wright, US investment manager at Britannic.
Wright says within the energy sector, the oil subsector is promising, based on a positive outlook for earnings, and the fact that the higher oil prices are not yet factored into share price valuations.
Oil prices have comeback to around $25 barrel, from their peak of $32 in early March but are still well above their February 1999 lows of $10.
The falling back of oil prices should also benefit the chemicals, refining and marketing businesses of the integrated international oil companies. Margins, which had been under pressure from higher energy costs, are now expanding as the energy costs decline.
Wright says with the correction in Nasdaq, the energy sector shapes up as a viable defensive sector. At the same time, it does not demonstrate the fundamental concerns of other old economy stocks.
On the downside, however, there is a risk that relative earnings momentum may have peaked for the energy companies, following the sharp recovery in the earnings of these companies.
Wright says: "Another concern is that if the market falls in love with technology again, these stocks will be left behind."
Valuations are in the middle to upper range, according to Wright. Exxon, for example trades on 14 times cash flow. Wright says these prices can be justified because of promising prospects in the company over the near term.
He says: "Exxon is the largest international oil company in the world. It is the most shareholder friendly of the integrated oil companies and consistently generates the highest returns in the industry. It is currently in the process of integrating the Mobil acquisition into the company and we expect that will generate much greater cost savings than originally forecast.
"Schlumberger is the largest oil service company in the world and is benefiting from a pick up in expenditure by oil companies in their explorations budgets for oil and gas. Relative to its competitors it is more technologically advanced and able to provide a whole range of services to customers."
Martin Currie is neutral in energy stocks, yet within its holdings, there is a a bias toward gas and deep sea drilling.
Grant Wilson, US fund manager at Martin Currie, says: "Gas is very interesting as a source of energy. The US Government had previously created an environment which was unfavourable to gas usage, preferring instead to use nuclear energy. Now gas is favoured and is seen as the environmentally clean fuel. New energy generation plants which are being built can run on a number of different fuels but gas is the main choice."
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