S&P recommends marketweighting the S&P 500 Energy sector. Year to date through November 18, the S&P Energy Index, which represented 12.4% of the S&P 500 Index, was down 0.1%, compared to a 3.3% decline for the S&P 500. In 2010, this sector index advanced 17.9%, versus a 12.8% increase for the 500. There are seven sub-industry indices in this sector, with Integrated Oil & Gas by far the largest at 56.7% of the sector’s market value.
S&P equity analysts have a positive fundamental outlook on the influential Integrated Oil & Gas sub-industry, as well as most of the sector’s other smaller sub-industry groups due to strong emerging market energy demand and tight global capacity. However, we believe that while oil prices will remain historically elevated, averaging $92.35/bbl. in 2011 and $95.53/bbl. in 2012, energy price appreciation will slow relative to 2010’s big advance owing to uncertain U.S. and European growth prospects. According to Capital IQ, the sector’s recent valuation of 9.8X consensus estimated 2012 EPS is below the 500’s P/E of 11.3X, as oil price volatility keeps investors from assigning the sector too high a valuation, in our view. The sector’s P/E-to-projected-five-year EPS growth rate (PEG) ratio of 0.8X is below the broader market’s 1.0X. This sector’s marketweighted S&P STARS average of 4.3 (out of 5.0) is above the S&P 500’s average of 3.8.
The S&P GICS Energy Index has broken out from a bullish, inverse head-and-shoulders pattern. This suggests to us that the intermediate-term trend has turned bullish. However, prices have stalled up at the next area of formidable overhead supply in the 530 to 560 region. Prices have rallied back above their 17-week and 43-week exponential moving averages, a bullish sign, in our view. The 17-week has been rising since mid-October and is very close to retaking the 43-week exponential. A bullish crossover would be more confirmation that the longer-term trend is bullish. Relative strength vs. the 500 remains in a downtrend off the early April top; however, the RS line has rebounded nicely since the end of September, and is not far from breaking its downtrend. We have raised our technical opinion on the Energy sector to neutral with a bullish bias, from neutral with a bearish bias.
In all, we recommend marketweighting the Energy sector based on our view that more subdued oil price appreciation offsets low valuations.
Some of the notable energy companies making the list are well known such as COP and CVX. However, other energy companies offer high yield dividends such as LUKOY (7.4%), PSE (7.8%), REPYY (7.8%), YPF (10%) and ERF (8.9%).
OAO Lukoil (LUKOY), together with its subsidiaries, engages in the exploration, production, refining, marketing, and distribution of oil and gas in Russia and internationally. EPS increased from $10.93 to an estimated $13.71 over the past 5 quarters indicating an improving growth rate. Analyst forecasts have recently been raised. Lukoil Oil Company’s stock price is down 11.1% in the last 12 months, down 10.7% in the past quarter and down 10.3% in the past month This historical performance should lead to above average price performance in the next year.
The passing of 2010 marked a series of changes for Enerplus (ERF), as it converted from an income trust to a corporation. The company sold off conventional and oil sands assets, using the proceeds to build its acreage position in Pennsylvania’s Marcellus Shale and the Bakken in North Dakota and Saskatchewan. We think the company will continue to pay an attractive dividend and aggressively pursue production growth in the Marcellus and Bakken. ERFs development efforts in the Marcellus Shale should lead to strong production growth through 2015.
Here is a list of dividend payers in the energy sector ranked as very bullish or bullish by equity summary score worth a look for 2012.