Recalling the shocks of the sharp oil-price downturn back in 2014-2015, many investors have remained wary of energy stocks even as prices began to rebound this year. Here, Franklin Equity Group’s Fred Fromm, vice president and portfolio manager, Franklin Natural Resources Fund, says they shouldn’t be. Short-term volatility aside, he digs deeper into industry fundamentals that he thinks make for an attractive longer-term investment case for oilfield services stocks.
Global oil prices rose to two-year highs in early November of this year after booking monthly gains in September and October. Oil prices have benefited from strong demand growth in many parts of the world—emerging markets in particular—and output restraint that has tightened supply-and-demand fundamentals.
Despite the recent oil-price rally, many investors have remained reluctant to buy energy stocks, as evidenced by the sector’s general underperformance this year.1 Oilfield services stocks have been particularly weak.
Why Investors Are Reluctant to Buy Energy Stocks
Many investors remain wary of energy stocks following a three-year slump in oil prices. Prices began to fall in 2014 when global supply started to rapidly outpace demand, largely due to the US shale oil revolution. By 2016, benchmark West Texas Intermediate (WTI) and Brent oil prices fell below $30 a barrel, leading many companies to either go bankrupt or slash exploration and production spending.
An initial decline in US production combined with coordinated supply cuts by major suppliers in the Organization of Petroleum Exporting Countries (OPEC) and partners have helped bring oil back up to $50-$60 a barrel this year. However, prices are still far below the $100+ peak we saw four years ago.
Given the current lower-price environment, market volatility and future uncertainty, many investors have perceived oilfield services stocks as too risky. That, in turn, has led to more attractive valuations for these stocks that we believe could be creating attractive investment opportunities.