Content Provided by Paula Wieck, CLS Investment Research Manager
Outside the U.S., oil and natural gas prices have stayed high, particularly in Europe and Japan, where resources are limited. In the meantime, the U.S. is experiencing a boom in oil and natural gas production! America’s dependency on foreign imports of oil and natural gas has decreased substantially over the last seven years, as our imports have fallen from 60 percent in 2005 to 41 percent today. This increase in domestic supply has meant that oil and natural gas prices have decreased substantially in the U.S. How is this good for domestic energy then?
American energy companies have become more competitive compared to their international counterparts. U.S. companies can profit by exporting liquid natural gas to regions where natural gas prices are five or six times higher than the prices domestically. The domestic supply has been able to increase because of new discoveries, more licenses to drill in the Gulf of Mexico, and more hydraulic fracturing for natural gas.
Even though supply has increased and demand has lowered (as global growth has remained slow), I find it unlikely that prices will go much lower. Emerging markets such as Asia are expected to increase their demand as they try to grow their economies. China and Brazil are becoming drivers of global demand. Not to mention, there is always the potential for supply-chain disruptions due to Middle East tensions. In addition, environmental groups that are “anti-fracking” could hinder shale gas production, which would increase gas prices. However, I don’t see much downward pressure in oil or gas prices due to these factors.
Valuations for the energy sector are incredibly attractive. Exploration and production equities historically trade at 5x P/CF, in a range of 4.2x to 5.8x. The group is trading at 3.6x 2014 estimates, off lows of 3.1x, as gas prices have rebounded recently. Energy was one of the worst performing sectors of 2012, however year-to-date, energy is the best performing sector, up over 9 percent.
This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not a guide to future performance.