No spark ready to be observed for late US energy stocks

NEW YORK (Reuters) – Investors in US energy companies, whose actions have gone from daring to sullen artists during the Wall Street record race, may not be relieved in the future and are now facing a fragile global economy. skepticism of the market.

Energy was the worst performer of the 11 sectors of the S & P 500 this year, the worst performer since the 2016 election of US President Donald Trump and the worst performer since the start of the rise in the US stock market there is more ten years.

As a result, the S & P 500 energy sector has the lowest weight among all .SPX S & P 500s since at least 1995, according to data from Refinitiv Datastream. It represents less than 5% of the benchmark, compared with more than 15% in mid-2008, when oil prices reached historic highs of over $ 140 per barrel, nearly three times the levels. current.

But this year, the energy sector has not even managed to keep up with the oil price, despite their traditional tendency to go in the same direction.

The low yields gave hope that the sector would soon find a floor to bounce back, especially attractive dividend stocks, but that remains to be seen.

"The industry in general is at a point where it is very difficult for institutional investors to embark because it is a chronic underachiever," said Walter Todd, chief investment officer at Greenwood Capital in North Carolina. South.

Since the beginning of the current uptrend in March 2009, the S & P 500 index, which many investors see as an approximation of the stock market, has climbed by more than 300%, while the sector of energy climbed 32%.

Chart: S & P 500 vs. Bull Market Energy Sector – here.jpg

Oil prices rose relatively little in the bull market, which largely overlapped a US economic expansion characterized by modest growth and an explosion of shale exploration that allowed the country to become the world's largest oil producer.

However, this year, US crude oil prices have risen more than 18% to about $ 54 per barrel, compared to a 3% decline for the energy sector, although there is a large disparity of performance among the 28 S & P 500 energy stocks.

Chart: Winners and losers of the energy stock in 2019 – here

"If you look over the last 18 to 24 months, the reason this space is so frustrating is because, when oil picks up, it picks up but not as much as you think it should," Todd said. "But then, when the oil comes in, they are crushed."

In the past, investors were wary of energy companies spending their cash and drilling wells without adequate returns, said Pearce Hammond, managing director of Simmons Energy in Houston.

"Basically, they were destroying capital," Hammond said. "It seems that this year was the year when investors said:" Stop "."

Trump sought to abolish regulations for energy and natural resource companies, but the sector still faced difficulties during its administration.

"If you remove the regulation, you're inviting more drilling, which adds an offer, which means lower prices," said Christian Ledoux, investment director of South Texas Money Management in San Antonio.

Trump's tariff battle with China raises concerns about the economy. Indeed, the fall in long-term yields in the US Treasury bond market has reversed the yield curve, signaling that the recession may be looming. This could particularly affect energy stocks.

"This is an economically sensitive space and they are probably one of the biggest casualties of any trade war problems," said Burns McKinney, portfolio manager at Allianz Global Investors in Dallas.

Energy stocks underperformed on Friday, as trade tensions rose and China threatened to impose tariffs on crude oil imports for the first time for the first time.

Some investors are avoiding the fossil fuel industry because they worry about their impact on climate change.

"Oil and gas companies, for many investors, have become a bit of a pariah," said Hammond.

Chart: Energy Sector Weight in the S & P 500 Over Time – here.jpg

Certainly, energy stocks have suffered so much that some strategists and investors say that they are becoming attractive.

Tobias Levkovich, equity strategist at Citigroup, calls the sector "overweight", noting that its valuation is the most attractive compared to the S & P 500 since 2002. But in a recent report, Levkovich conceded: "We have trouble to identify the catalysts return to the sector, unless a major disruption of supply. "

Some investors believe that energy stocks could simply benefit from a catch-up trade with oil.

Another factor is the high dividend payout rates of some companies as yields on US Treasuries have fallen. Exxon Mobil Corp's (XOM.N) a dividend of 5%, while Occidental Petroleum Corp. (OXY.N) gives 7%, against only 1.54% on the 10-year US Treasury bill.

"If you stick to investment grade companies, there's a pretty small list of energy companies to invest in, and if you did, you'd probably be OK," said Ledoux, whose equity holdings in the company include Chevron Corp (CVX.N).

However, Robert Pavlik, chief investment strategist at SlateStone Wealth, slightly underweight in the sector, said he could sell energy holdings if stocks went up in order to make a profit.

"I do not think there is as much potential," Pavlik said. "Where will the oil go if the entire industry continues to move (towards alternative energy) in the state and if we are considering a downturn in the economy?"