The week of May 27 brought a welcome sign for the oil bulls. That would be the return to $50 oil, no matter how brief that price was seen. It was not that long ago that oil was under $30 a barrel. Still, the oil and gas sector has been pricing in a more normalized range for some time. We are starting to see a mixed performance in oil stocks now, perhaps because investors have voted on which companies will survive and which ones will continue to struggle.
Investors keep proving that they are willing to buy the big stock market sell-offs. The strategy of “Sell in May and go away” did not come on too strong this month, leaving many bargain hunters seeking value and long-term upside.
24/7 Wall St. reviews dozens of analyst upgrades and downgrades each day, which this becomes hundreds of analyst calls throughout the week. There remains a huge interest in which oil and gas stocks now offer long-term upside for investors. What investors need to consider here is that many oil and gas stocks have risen massively from their lows. Some of the stocks may have even risen by too much. What do pops of 75%, 100% or more tell you?
Investors also need to keep in mind that many energy analysts did not adequately brace for the downside that was seen in 2015. Many of the same analysts also have been late to change their negative bias in the latest run-up.
24/7 Wall St. saw eight analyst upgrades and positive research calls that stood out among the energy sector calls. There were of course other analyst calls, where Buy ratings were reiterated with price target changes.
Before chasing these stocks blindly, investors should understand that oil came a long way down before this rise from the graveyard. Even if oil stays at $50, many companies will continue to operate in a semi-zombie mode. Some companies will continue to enter bankruptcy. And, sadly, there will continue to be more layoffs in energy.
Investors should just assume that it will be some time before we see the higher oil prices reflected into broad industry earnings for the oil and gas sector. S&P sent out a note on Friday saying that the energy sector will post a drop of 106.6% in earnings to quarterly net losses — for the first time since S&P began collecting data.
Another warning here is that energy analysts are almost always making long-term calls rather than short-term ones. These could all see a lot of downside before analysts change their tune. Lastly, if OPEC delivers bad news or if global demand trends start to take oil back toward $40 or lower, these calls will look way too optimistic (if not silly).
Here are eight analyst upgrades and positive research calls covering the energy sector for the week ending May 27.
On May 26, 2016, AmeriGas Partners L.P. (NYSE: APU) was started with a Buy rating and was assigned a $50 fair value estimate at Janney Montgomery Scott. Its units were trading at $45.77 on Friday’s close, but the yield-equivalent from the distribution here is roughly 8%. Janney’s report said:
The strong yield on what we consider a stable MLP creates attractive opportunities for those in search of higher returns. While our outlook on the domestic propane market in general is neutral, we note that there are plenty of opportunities for growth, especially in the domestic market, given the fragmented nature of the propane market and AmeriGas Partners’ ability to consummate transactions.