Energy stocks are cheap, according to Morningstar. An exchange-traded fund that holds oil-equipment and services stocks may be one way to take advantage.
Dave Meats, an energy analyst at the Chicago-based research firm, published a note on Thursday arguing that although the coronavirus might reduce demand for oil, production might not rise as much as expected when OPEC countries’ latest pledges to reduce output expire at the end of March. Civil unrest in Libya accounted for much of the oil taken off the market, and is likely to continue, he said.
Moreover, Meats says, the market is “underestimating the impact of last year’s slowdown in the U.S. shale patch,” where the number of drilling rigs being used to search for oil has dropped as producers shift from growth to returns.
Oilfield-service companies are the most underpriced by Meats’ lights, trading at an average discount of 40% to Morningstar’s fair-value estimates. Integrated oil and refining stocks are at 30% discounts, while midstream stocks, with their lower exposure to commodity prices, are at 20% discounts.
The market is “failing to appreciate the required increase in oil and gas capital expenditures in the next several years,” says Meats. That spending is likely to translate into revenue for equipment and services companies.
ETF investors trying to bet on Meats’s analysis can consider the iShares U.S. Oil Equipment & Services ETF (ticker: IEZ). The fund has 22% of its assets in Schlumberger (SLB). Halliburton occupies another 20% of the fund’s assets. The fund is down more than 19% from February 19 through February 28th. The S&P 500 Index, by contrast, is down more than 12% over that time.
Author: John Coumarianos
Source: Barrons: Energy Stocks Have Plunged. Here’s an ETF to Play a Rebound.