Wall St. Cautious Over Energy Sector’s Outlook for Next Year
President Bush’s energy plan, unveiled Thursday, helped spark a broad rally across the energy sector and among firms that stand to benefit by selling equipment and services to oil and natural gas companies.
Yet Wall Street has been taking a cautious stance toward energy shares in recent months, and Thursday’s rally doesn’t change much, some analysts and money managers say.
Despite the long-term earnings boost the sector could get under Bush’s plan, many oil and gas companies are expected to post lower earnings in 2002 than in 2001, analysts estimate.
That reflects expectations that crude oil and natural gas prices will at best stabilize at current levels--which are down sharply from their 2000 peaks--or head lower.
Thus, after heady gains in 1999 and 2000 as oil and gas prices rocketed, many energy stocks have stalled this year.
The American Stock Exchange index of 15 major natural-gas-related stocks, for example, is down 4% year to date. The Standard & Poor’s index of six large oil and gas exploration and production companies has lost 5.3%.
Schlumberger (ticker symbol: SLB), a leading oil-field services company, has seen its shares pull back 15% since Jan. 1, even with a gain of $1.78 to $67.99 on Thursday.
By contrast, the blue-chip S&P; 500 index is down 2.4% this year.
Craig T. Callahan, manager of Icon Energy stock mutual fund and chief investment officer at the Icon Funds group, said investors need to be choosy to find good buys today in the energy sector.
“We’re leaning more toward the refiners than the drillers because they’re the better bargains,” he said. “And at this point the good news looks fully priced into the services and equipment group.”
After betting big on the energy sector in early-1999, Callahan took profits earlier this year. “We just don’t see energy as a leader anymore--its leadership days are done,” he said.
Callahan shrugged off any potential windfalls from Bush’s proposal. “We look at these companies from the bottom up and pretty much ignore the macro trends,” he said.
For the near term, investors have to cope with the prospect that earnings at many energy companies will decline in 2002.
Chevron (CHV), for example, is expected to earn $7.20 a share this year, according to analysts’ consensus estimate as tracked by IBES/Thomson Financial. But next year the company’s earnings are expected to fall to $6.20.
At the stock’s current price--it rose 41 cents to $95.66 Thursday--the price-to-earnings ratio based on estimated 2002 results is 15. That is lower than the average blue-chip stock P/E of 21, but experts note that energy stocks generally have lower P/Es because of the inherently cyclical nature of the business.
Still, some analysts believe the Bush energy plan could revive interest in many energy shares, if investors take a longer-term view.
Companies that explore for, produce and refine oil and gas could be among the biggest beneficiaries of Bush’s initiatives, said Corey McElveen, stock analyst at Morningstar Inc. In particular, he cites Phillips Petroleum (P) and Exxon Mobil (XOM), which already have operations in energy-rich Alaska. Phillips rose $1.72 to $65.87 on Thursday, while Exxon Mobil eased 77 cents to $88.73.
Callahan, however, favors companies that focus on refining. Ashland (ASH), Pennzoil-Quaker State (PZL) and Sunoco (SUN) are among the refining stocks with reasonable valuations and plenty of upside, he said.
Ashland eased 17 cents to $43.50 Thursday, Pennzoil-Quaker added 5 cents to $15.96 and Sunoco rose 98 cents to $41.45.
Some money managers prefer to leave the traditional oil and gas stocks for others--in favor of alternative energy issues.
John Hammerschmidt, manager of Turner New Energy & Power Technology Fund, likes the potential of companies such as Energy Conversion (ENER), which is seeking to develop cheaper and sturdier solar panels, and AstroPower (APWR), another solar firm.
Energy Conversion jumped $3.53 to $31.28 on Thursday while AstroPower leaped $3.38 to $54.93.
In the fuel cell industry, Hammerschmidt pointed to Ballard Power Systems (BLDP), whose products are being used in clean-running buses in Los Angeles and elsewhere, and FuelCell Energy (FCEL). A tax credit for fuel-cell vehicles, as proposed by Bush, “could be huge” for such firms, he said.
Ballard jumped $8.37 to $57.60 and FuelCell rose $4.98 to $85.28.
But fuel cell companies, are, for the most part, far away from profitability, Hammerschmidt warned, so they may make for an especially speculative and risky investment.
Many alternative-energy shares also rallied strongly in 2000--only to tumble.
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Energy Stocks: A Mixed Bag
President Bush’s energy plan, unveiled Thursday, promotes aggressive new development of energy resources and is a long-term plus for many energy companies, analysts say. Yet stocks of many energy companies have stalled in recent months after soaring in 1999 and 2000 as crude oil and natural gas prices surged. A pullback in oil and gas prices this year has left some investors suspicious of energy shares, experts say.
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Oil-Field Services Shares Stall . . .
OSX index of 15 oil-field services stocks, monthly closes and latest
Thursday: 133.12
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. . . As Do Natural Gas Shares . . .
Amex index of 15 natural-gas-related stocks, monthly closes and latest
Thursday: 254.35
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. . . Amid Analyst Caution About Earnings
Energy companies’ earnings have surged this year, but the stocks largely anticipated those results with last year’s gains. Even though the price-to-earnings ratios of energy stocks appear low, that reflects an expected drop in earnings for many of the companies in 2002. Analysts’ estimates for key stocks:
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Thurs. Est. EPS: Est. P/E Stock close ’01 ’02 ’01 ’02 Apache $61.80 $7.31 $6.07 8 10 BJ Services 79.30 3.84 4.92 21 16 Chevron 95.66 7.20 6.20 13 15 El Paso 61.76 3.32 3.93 19 16 Exxon Mobil 88.73 4.74 4.49 19 20
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Thurs. Est. EPS: Est. P/E Stock close ’01 ’02 ’01 ’02 Noble Affil. $43.38 $4.50 $2.62 10 17 Pogo Producing 29.05 2.39 2.00 12 14 Schlumberger 67.99 1.90 2.62 36 26 Tosco 50.56 3.80 3.64 13 14 Unocal 38.93 3.38 2.47 12 16 S&P; 500 1,288.49 56.44 60.19 23 21
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Sources: Bloomberg News, Thomson Financial, Times research
