Investors shy away from energy stocks

Posted: Friday, September 05, 2003

NEW YORK (AP) Ask investors what they are looking for in stocks, and they are sure to point to strong earnings, pricing power and healthy dividends. Then ask what they're buying, and they are likely to tell a very different story.

Nothing in today's market might reflect that disconnect more than investors' tepid interest in energy stocks. Their strong fundamentals should make them a stock-picker's delight, but these shares still aren't getting much attention.

''The market is so convinced that oil and gas prices are about to drop that they won't reward the energy sector,'' said Tina Vital, an energy stock analyst at Standard & Poor's.

The 23 energy companies in the S&P 500 index had earnings gains of 41 percent in the second quarter, far outpacing the index's 10 other sectors, according to Thomson First Call. That followed a 180 percent first-quarter jump and a 51 percent climb in the last quarter of 2002.

Behind those gains: high prices. Unlike what most other industries have faced in these tough economic times, energy companies haven't come up against price deflation.

Crude oil prices now trade at about $30 a barrel. While that is down from their run up over $37 a barrel as the war began in Iraq in mid-March, there hasn't been the steep slide in prices that was expected once the military conflict ended.

Natural gas prices are also soaring, and that helps boost crude oil prices because manufacturers are choosing to run their plants on crude-derived fuels rather than natural gas.

And gasoline prices especially what consumers pay at the pump have skyrocketed, with some states seeing prices surge to record levels.

On top of the strong earnings, these energy companies offer higher dividends than many other sectors in the broader market. The current dividend yield the amount of money per share paid to investors divided by the stock price on that group of stocks is 2.6 percent vs. 1.8 percent for the S&P 500.

But all this good news has been largely overlooked by investors.

While the S&P 500 is up more than 14 percent this year, energy shares have climbed only about 7 percent. Contrast that with the 28 percent gain in the S&P 500's information technology stocks.

Investors are worried that the energy sector is on the brink of collapse because prices will soon plunge as more supply floods the market. When that happens, earnings will retreat, too.

These, though, have been concerns all year, and so far they haven't come true. And an imminent pullback is becoming increasingly unlikely given some recent evidence that supports higher prices for at least the year ahead.

The International Energy Agency said earlier this month that global oil demand is higher than it originally thought, due in part to the Chinese economy's faster-than-expected recovery from SARS.

In terms of supply, Iraqi production remains very limited, with far less oil coming from there than had been expected last spring. The August blackout, which temporarily shut down seven gasoline refineries, and continued unrest in oil-rich Nigeria have added to the supply issue.

Domestically, commercial inventories of crude fell by 200,000 barrels to 278.6 million barrels for the week ending Aug. 22. That's 20.2 million barrels less than last year at this time, according to a U.S. Energy Department.

So while demand expands, supply remains tight. And as the economy improves, that difference may only be more exaggerated making it less likely for prices to collapse.

''Looking forward, as the global economy recovers, it is difficult to imagine that (crude oil) prices could be back to the low or even mid-$20s as we had previously assumed, unless radical changes take place on the supply side,'' said Eric Chaney, co-chair of the European economics team at Morgan Stanley in London.

Of course, there is really no telling what is to come, what global shocks will cause the marketplace for energy products to shift.

Just look what happened Tuesday, when oil prices tumbled about 6 percent as traders expected softening demand due to the end of the peak summer driving season.

And when considering the larger economic picture, maybe investors had it right all along with their aversion to energy stocks. When energy companies do well, that's usually driven by higher prices which can hurt other sectors of the economy struggling to recover.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org



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