Continue reading this on our app for a better experience

Open in App
Home News Oil & Gas

J P Morgan strategist who nailed energy surge says rally not over

Bloomberg10/8/2021 09:47 AM GMT+08  • 3 min read
J P Morgan strategist who nailed energy surge says rally not over
The case for prolonged outperformance is now in place for the energy sector.
Font Resizer
Share to WhatsappShare to FacebookShare to LinkedInMore Share
Scroll to top
Follow us on Facebook and join our Telegram channel for the latest updates.

At the start of 2021, Dubravko Lakos-Bujas was one of the rare bulls on energy stocks. After a surge of almost 50% for the shares, the JPMorgan Chase & Co. strategist says the rally has further to go.

Oil and gas producers are among the best performers in the S&P 500 this year, with companies such as Devon Energy Corp. and Marathon Oil Corp. more than doubling.

Still, bearish bets on energy shares have climbed, with investors remaining leery of owning them. The aversion contrasts with the industry’s improving outlook -- a setup that will allow valuations to expand and catch up with fundamentals in a process known as re-rating, according to Lakos-Bujas and his team.

“We expect the sector to re-rate as companies deliver strong results, raise guidance, and reiterate their focus on shareholder capital return rather than unprofitable market share gains,” the strategists wrote in a client note Thursday.

“In a world where most assets have broadly re-rated due to lower rates and liquidity, energy still offers non-linear earnings growth potential for several years at an attractive valuation.”

Energy shares trail pre-Covid peak even as oil has surged past its high

Of course, the industry’s fate is closely tied to energy prices, which are sometimes at the whim of politicians. The latest example came this week, when Russian President Vladimir Putin’s comments on European gas supplies sparked a sharp decline in prices from oil to natural gas. Oil rebounded Thursday after the US Energy Department said it has no plans to tap the nation’s reserves at this time.

For J P Morgan’s strategists, years of underinvestment due to low profitability and restrictive environmental policies resulted in a shortage of supply that has deepened during the pandemic. They said the case for prolonged outperformance is now in place for the energy sector.

Underpinning Bull Case:
While oil prices are 25% above pre-Covid levels, the group of large-cap energy shares is still down 2%

All US producers were profitable in the second quarter, versus 33% a year ago and 91% pre-Covid

Energy shares trade at a near-record low relative to their book value

They offer attractive dividend yield of about 4% -- versus 1.4% for the S&P 500 and a 10-year Treasury yield of 1.5%

Share buybacks could return to the level of US$40 billion a year, as seen in the 2012-2014 period, should oil prices stay elevated

Photo: Bloomberg

Loading next article...
The Edge Singapore
Download The Edge Singapore App
Google playApple store play
Keep updated
Follow our social media
Subscribe to The Edge Singapore
Get credible investing ideas from our in-depth stock analysis, interviews with key executives, corporate movements coverage and their impact on the market.
© 2022 The Edge Publishing Pte Ltd. All rights reserved.