Making the case for investing in energy stocks
Investors who own energy stocks have seen more than their share of swings in recent years.
After a two-year slide, the sector rebounded in 2016 as crude oil prices stabilized above $50 a barrel to lead all other sectors in the Standard & Poor’s 500 index. But so far this year, the sector is the S&P 500’s biggest decliner, down 17.1 percent.
The slump comes as the price of U.S. crude oil has declined nearly 10 percent this year to $48.41 a barrel. Just three years ago, it topped $100 a barrel.
While energy companies in the S&P 500 ceased being a drag on the index’s overall earnings this year, many investors remain weary over an oil supply glut that continues weighing down crude prices.
Even so, Derek Rollingson, portfolio manager for the ICON Energy Fund, makes the case for investing in energy stocks, noting that companies are becoming more efficient and stand to benefit from developing countries’ growing energy needs.
Answers have been edited for length and clarity:
Q: How should investors think about the performance of an energy sector fund like yours, given the turbulent swings in the sector we’ve seen in recent years?
A: The past few years have been tough as an energy fund manager. Fortunately, as an active manager, I have being able to adjust the portfolio to help reduce the volatility of the ICON Energy Fund. When you compare our performance relative to our peers it shows that historically we have been able to moderate that volatility. However, going forward the bottom line is that past turbulence has made energy companies better and leaner and I’m excited about the opportunities that are currently available in the energy sector.
Q: Is it your sense that a global oil supply glut is what’s primarily weighing on energy stocks?
A: Pricing mechanics in oil, since mid-2014, have been focused on supply exceeding demand, which led to a buildup in oil inventories. Recently, however, that has begun to change. Recent data has showed inventories declining. If this trend continues again, it is another positive for both oil pricing and energy stocks.
Q: Do oil prices have to climb further before shares in energy sector companies recover from their steep slump?
A: While higher commodity pricing would be an obvious boon for energy stocks, investors should not underestimate the power of higher production in a lower margin environment as a good path to improved earnings. I have heard this referred to in the energy sector as the “New Abundant,” where lower margins can be offset by increased volume.
Q: For investors weighing whether to buy into an energy stocks fund, would you say the steep pullback in the sector this year represents a good value or should investors hold off until oil prices rebound, the supply glut eases or some other catalyst?
A: If investors wait for the news to be much better for the energy sector, there is a chance that they will miss the initial bump in sector. The improvement in the earnings and anticipated earnings growth in the energy sector, especially in the exploration and production industry, already shows the improving economics within the sector. I believe the lack of energy stock price response has presented investors with an entry point into energy. Earnings and revenue growth coupled with declining inventories and improving global economic conditions equate to a good opportunity to establish a position in energy.
Q: What’s your outlook on developing economies increasing their demand for oil in the next few years?
A: Emerging markets have shown notable improvement over the last year or so. This has been reflected in their strong stock performance year to date. Growth in these developing markets is key to growth in energy demand. A focus on increasing demand increases the optimism for oil pricing and is yet another strong argument for establishing a long-term position in the energy sector.