Wall Street’s Most-Loved Stocks Just Can’t Shake Investor Fears

(Bloomberg) -- No one wants to buy energy stocks these days. But sellside analysts are staying bullish.

Barely in the green this year, the S&P 500 Energy Index has been hit by volatility in both oil and natural gas prices. The gauge has risen a mere 1.3% compared with a 15% gain in the benchmark index for American equities.

Analysts aren’t concerned -- they expect energy stocks to deliver the best gains among major S&P 500 sectors, rising more than 26% over the next 12 months, according to data compiled by Bloomberg.

“The energy sector has been a disappointment for investors in 2019, generating the worst return of all sectors,” Tobias Levkovich, Citigroup Inc.’s U.S. equity strategist said in an Aug. 9 research report titled “Does Anyone Care About Energy Anymore?” It is “one of the least preferred groups according to our latest client survey work, with oil and gas pricing being a key issue.”

Whether the performance is measured on a one-month, six-month or 12-month horizon, shares of energy companies trail all 10 major industries. The group has seen its contribution in the S&P 500 falling to the lowest since at least 1990.

In Canada, the S&P/TSX Energy Index is the worst performing sector with a 3.2% climb, while the benchmark S&P/TSX Composite Index advanced more than 13%.

Little Interest

Oil & gas companies have been shifting their spending to shareholder returns, boosting buybacks over capital spending, in hopes of garnering more investor attention, but interest remains scant.

“The energy sector is suffering from one very clear problem: there are NO buyers of energy stocks,” said Eric Nuttall, senior portfolio manager of Ninepoint Partners in a report earlier this month. “To even the most casual market observer, it should be blatantly obvious that the energy sector is broken.”

While analysts focus on cheap valuations and a possible rebound in profits, weakening global growth makes investors hesitant to go bargain hunting in energy shares. During the past year, value stocks have lost favor as money keeps flowing to defensive stocks and companies whose earnings are seen resilient amid an economic slowdown.

While the expected rally, as implied by the average 12-month price targets, may reflect a constant decline in shares, it also shows analysts are standing pat with their bullish views. Buy recommendations for the S&P 500 Energy Index are near previous highs, Levkovich said. This implies that energy’s sell-side hasn’t capitulated to market concerns as seen in 2009 or 2016.

Investors have urged firms to increase shareholder-friendly initiatives such as share buybacks versus dilutive equity raises and funding new wells. And many E&Ps have buckled under the pressure:

• Permian Basin-focused Pioneer Natural Resources Co. recently gifted investors a dividend that’s 22 times larger than what it paid out during shale’s heyday half a decade ago.
• Peer Diamondback Energy Inc. pledged to buy back $2 billion in stock and sell some fields.
• Marathon Oil Corp. more than doubled its share buyback program to $1.5 billion
• WPX Energy Inc. said it will repurchase up to $400 million of its stock over two years while maintaining its capital spending plan for 2019.

When Will They Come Back?

Still, it’s unclear what could spark investor interest again.

“We along with others struggle to perceive which catalysts encourage the Street to step back in to the sector, short of a major supply disruption,” Citi added in its note while also highlighting a less buoyant earnings profile for the group.

Last month, Jefferies’ strategy team cut their energy rating: “The one sector we just can’t seem to get right is energy.”

One respite for the sector could be a weaker U.S. dollar. “In the past, dollar weakness has been a key support for commodities including energy,” Levkovich said. “But, we may need to see some better appetite for cyclicals in general which might require improved capex trends, something we do not expect in the next couple of months.”

--With assistance from Rachel Adams-Heard.

To contact the reporters on this story: Michael Bellusci in Toronto at mbellusci2@bloomberg.net;Lu Wang in New York at lwang8@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Divya Balji, Cormac Mullen

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