The price of oil is finally back above $50 and Dan Steffens, President of the Energy Prospectus Group, believes the remainder of the year will be quite bullish for the energy sector.
Consider Dan Steffens: Energy Sector Massively Undervalued (Podcast)
Market Direction Is Up
With demand projected to continue growing this year into next, inventories tightening and continuing to fall, and rig counts decreasing, we can expect oil prices to go up into year-end, said Steffens.
It’s interesting to note that in the first quarter, S&P 500 profits largely came from the energy sector. Yet, energy stocks have been decimated since then.
Steffens follows about 50 publicly traded companies, and almost all are down year-to-date even though they’re having a better year financially.
There's “this fear that there’s going to be a big collapse in oil and gas prices,” he said. “I don’t see it happening. I don’t see any way sub-$50 oil can be maintained and meet future demand for refined products.”
While Steffens doesn’t think we’re going to see $100 anytime soon, he believes we will hit around $65 oil in 3 or 4 months.
Energy Stocks Unloved
The IEA’s recent bullishness and possible drawdowns in inventory should push up oil prices. Wall Street still has to be convinced of the move before energy stocks will benefit, however.
He has a group of energy stocks he calls the Sweet 16, half of them S&P 500 companies. All are trading at big discounts to his valuations, Steffens noted, and he’s still assuming $50 oil and $3 natural gas prices in his valuations.
“I’m still coming up with valuations way above where these stocks are trading,” he said. “They’re trading as if oil is below $40 and gas is going to stay $2 forever. I think there’s a lot more upside than there is downside at this point.”
It’s probably a good time for investors to dip their toes in the energy sector now, Steffens stated.
For risk-averse investors, he suggests looking at larger cap companies. The main issue for these players is debt, so watch for excessive leverage relative to well production.
If the current crop of energy companies have survived the last 3 years, they’ve survived much worse prices and are probably good bets, Steffens stated. Investors need to keep their growth potential in mind, and also whether their stocks pay dividends.
Ultimately, Steffens sees strong returns for energy stocks and the oil price by the end of the year.
“I’m expecting a strong fourth quarter,” he said. “In prior cycles, the fourth quarter has been a really strong quarter as these things bounce back.”
