JPMorgan Strategist Who Nailed Energy Surge Sees More Gains

(Bloomberg) -- At the start of 2021, Dubravko Lakos-Bujas was one of the rare bulls on energy stocks. After a surge of almost 50% for the shares, the JPMorgan Chase & Co. strategist says the rally has further to go.

Oil and gas producers are among the best performers in the S&P 500 this year, with companies such as Devon Energy Corp. and Marathon Oil Corp. more than doubling. Still, bearish bets on energy shares have climbed, with investors remaining leery of owning them. The aversion contrasts with the industry’s improving outlook -- a setup that will allow valuations to expand and catch up with fundamentals in a process known as re-rating, according to Lakos-Bujas and his team.

“We expect the sector to re-rate as companies deliver strong results, raise guidance, and reiterate their focus on shareholder capital return rather than unprofitable market share gains,” the strategists wrote in a client note Thursday. “In a world where most assets have broadly re-rated due to lower rates and liquidity, energy still offers non-linear earnings growth potential for several years at an attractive valuation.” 

Of course, the industry’s fate is closely tied to energy prices, which are sometimes at the whim of politicians. The latest example came this week, when Russian President Vladimir Putin’s comments on European gas supplies sparked a sharp decline in prices from oil to natural gas. Oil rebounded Thursday after the U.S. Energy Department said it has no plans to tap the nation’s reserves at this time. 

For JPMorgan’s strategists, years of underinvestment due to low profitability and restrictive environmental policies resulted in a shortage of supply that has deepened during the pandemic. They said the case for prolonged outperformance is now in place for the energy sector. 

Admittedly, Lakos-Bujas has long been an energy bull. Back in December 2015, he upgraded the sector amid a slide in energy shares. Almost a year later, his team touted the industry as one of those that stood to benefit from the Trump administration’s pro-growth agenda. Then again in 2019, the strategist called for a rally after energy shares trailed both oil and the rest of the equity market. 

Energy shares beat the S&P 500 by 14 percentage points in 2016, and had since underperformed every year through 2020.

JPMorgan’s current Bull Case:

• While oil prices are 25% above pre-Covid levels, the group of large-cap energy shares is still down 2%
• All U.S. producers were profitable in the second quarter, versus 33% a year ago and 91% pre-Covid
• Energy shares trade at a near-record low relative to their book value
• They offer attractive dividend yield of about 4% -- versus 1.4% for the S&P 500 and a 10-year Treasury yield of 1.5%
• Share buybacks could return to the level of $40 billion a year, as seen in the 2012-2014 period, should oil prices stay elevated

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