Graphic: Energy stock bulls hit pause as recession looms

dAmico International Shipping SA

14/12/2022 07:00

By Danilo Masoni
       MILAN, Dec 14 (Reuters) - After two straight
record-breaking years, investors that profited from booming oil
stocks are now betting on a temporary retreat, as recession
threatens economies in the United States and Europe.
    A gauge of global energy stocks  .dMIWO0EN00PUS  is set to
rise over 35% for a second year in a surge that has propelled
Exxon Mobil's stock  XOM.N  to lifetime highs and caused the
price of most other oil majors to double or triple from 2020.
    But that rally now looks overdone given a darkening macro
outlook and the drop in oil  CLc1   LCOc1 , which has almost
lost all its gains this year. That has led some strategists and
portfolio managers to position for a pullback that could last
months until damage from the likely recession becomes clearer.
    Long-time energy bull Marko Kolanovic, a global markets
strategist at JPMorgan, is among those who have called time on
the rally, suggesting investors jump back only once the broader
market drops 20%-30%.
    "We believe that there is a tactical trade to sell energy
stocks. The catalyst for convergence would be a pullback in the
broad equity market," Kolanovic wrote in a note to clients, even
as he said long-term attractiveness of oil stocks was intact.   
    Like most cyclical stocks, energy will struggle in a severe
downturn. Citi estimates energy has been the worst-performing
sector across geographies during past contractions with earnings
per share falling by 53% to 124%. 
    TAKING PROFIT
    Generali Investments, which oversees 515 billion euros 
($543 billion), has switched to a "tactically neutral"
positioning on energy, having been overweight all year.
    "Although we still repute the sector structurally
undervalued, in the process to deleverage its debt position and
with decent cash flow growth in the next few years, we're taking
now a pause," strategist Michele Morganti said. 
    Data from BlackRock's iShares shows investors have pulled
money out from its exchange-traded fund that tracks the S&P
Global 1200 Energy Index  IXC . Outstanding units in the $2
billion fund have fallen 15% from a March peak to levels seen
before Russia's invasion of Ukraine raised the prospect of
supply shortages in the West.
    Andrea Scauri, a fund manager at asset manager Lemanik and
former oil analyst, expects big energy stocks to retrace, saying
recession risks and windfall taxes in Europe could slow the
momentum for a couple of quarters. 
    "I don't have any European oil major left in my portfolio
right now as I took profit on a big outperformance," he said. 
    Some are also looking at shorting oil stocks to profit from
expected price falls. An equity salesperson at Mediobanca
Securities has recommended opening a bearish bet on Italian
major Eni  ENI.MI  for example.
    The run has propelled the market value of top six U.S. and
European majors - Exxon, Chevron  CVX.N , Shell  SHEL.L ,
TotalEnergies  TTEF.PA , Conoco  COP.N  and BP  BP.L  - to near
$1.4 trillion, the most since 2008.
    STRUCTURAL TAILWINDS
    Like JPMorgan and Generali Investments, Lemanik's Scauri
remains upbeat on the longer-term outlook following years of
under-investment in exploration and given current geopolitical
tensions that have complicated supply routes.
    He still likes exposure to the sector but through companies
that face no windfall-tax risks like pipe-maker Tenaris
 TENR.MI , shippers such as D'Amico  B7C.MI  or service
providers like Subsea 7  SUBC.OL  and Technip  TE.PA . 
    Others are sticking to their bullish calls. Roland Kaloyan,
head of European equity strategy at Societe Generale, is
overweight energy going into 2023 and sees the potential for new
sector highs between the second and third quarter of next year.
    The MSCI World Energy Index is up 72% relative to world
stocks  .MIWO00000PUS  in the past two years but is down 12%
from last month's four-year peak. Generali's Morganti said
European energy is probably already halfway through its likely
decline. 
    ($1 = 0.9489 euros)
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
GRAPHIC-MSCI Energy vs Brent     https://tmsnrt.rs/3Pkj4r6
GRAPHIC-U.S. and European majors' market cap    https://tmsnrt.rs/3FnhLDi
GRAPHIC-MSCI Energy vs World    https://tmsnrt.rs/3iSYDVX
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 (Reporting by Danilo Masoni; Editing by Lisa Shumaker)
 ((Danilo.Masoni@TR.com; +39-02-66129734; Reuters Messaging:
danilo.masoni.thomsonreuters.com@reuters.net; On Twitter https://twitter.com/damasoni))