Energy stocks "a good value" despite lower oil: S&P Capital IQ

The drop in oil prices has taken its toll on energy stocks. But one strategist is optimistic on the sector’s prospects.

Crude prices (CLV15.NYM) are approaching $40 per barrel, down from nearly $100 a year ago. Lower oil prices helped to bring down the S&P 500’s energy sector, which is down 17% since the beginning of 2015. Energy (^GSPE) is the worst performer of the 10 major sectors in the S&P 500 (^GSPC).

Throughout the year, analysts lowered their expectations on energy stocks because of oil’s decline. But when second-quarter earnings came out, energy companies soundly beat Wall Street’s expectations. The sector’s earnings were on average 30% higher than analysts’ estimates. Five of the top 10 companies with the largest earnings surprises were in the energy business.

Company	Ticker	Sector	Q2 EPS Estimate	Q2 EPS Actual	% Difference
Electronic Arts	EA	Information Technology	$0.022	$0.15	650%
Hudson City Bancorp	HCBK	Financials	$0.005	$0.07	600%
Apartment Investment & Management	AIV	Financials	$0.097	$0.39	290%
Noble Energy	NBL	Energy	$0.074	$0.26	271%
Pioneer Natural Resources	PXD	Energy	$0.294	$0.10	233%
EOG Resources	EOG	Energy	$0.106	$0.28	155%
Newfield Exploration	NFX	Energy	$0.193	$0.46	142%
Prologis	PLD	Financials	$0.118	$0.27	125%
Transocean	RIG	Energy	$0.514	$1.11	118%
First Solar	FSLR	Information Technology	$0.253	$0.52	108%

Source: S&P Capital IQ

“Simply, we didn’t expect them to earn as much,” said Erin Gibbs, equity chief investment office at S&P Investment Advisory Services. But crude prices went from $49 per barrel in early April to $59 per barrel by the end of June, making the situation slightly better for energy companies.

Nonetheless, Wall Street remains fairly negative on the energy and is forecasting a 65% decline in third-quarter earnings from the previous year and a 56% drop in earnings for 2015 compared to 2014.

Get the Latest Market Data and News with the Yahoo Finance App

“I think this is actually over-pessimistic,” said Gibbs, who is responsible for over $16 billion in assets under advisory. “Energy companies can actually do better even with oil prices dropping recently. We’ve seen already stabilization in gas prices and we can see a little more stabilization in oil… They have the potential of easily beating earnings and doing better than we expect.”

Looking out to 2016, Gibbs anticipates 23% growth in energy earnings. Yet on a relative basis, the sector isn’t cheap. It is trading at roughly 26 times its expected next 12-months’ earnings compared to a multiple of 17 times for the overall S&P 500.

But Gibbs remains positive on energy.

“Taking into account we expect earnings to grow so much, particularly in the second half of 2016, they look a little more reasonable when you start looking at two years out, three years out,” she said. “I know it seems a little pricey right at this moment but ultimately it’s still a good value at this point."

 

More from Yahoo Finance

Forget China, the Fed needs to raise rates now: Top economists

3 reasons why China had to devalue: Deutsche

Billions of dollars in new headaches ahead for old real estate deals