Oil prices climbed on Monday morning after OPEC+ resolved on Sunday to stay the course on oil production cuts ahead of the implementation of a $60 price cap on Russian-origin crude oil negotiated by the EU, the G7, and Australia. OPEC+ had earlier agreed to cut output by two million bpd, about two per cent of world demand, from November until the end of 2023.
Still, oil prices are down more than 30% from their 52-week highs while, curiously, the energy sector is within just four percent of its high. Indeed, over the past two months, the energy sector’s leading benchmark, the Energy Select Sector SPDR Fund (NYSEARCA: XLE), has climbed 34% while average crude spot prices have declined 18%. This is a notable divergence because the correlation between the two over the past five years is 77% and 69% over the past decade.
According to Bespoke Investment Group via the Wall Street Journal, the current split marks the first time since 2006 that the oil and gas sector has traded within 3% of a 52-week high while the WTI price retreated more than 25% from its respective 52-week high. It’s also only the fifth such divergence since 1990.
David Rosenberg, founder of independent research firm Rosenberg Research & Associates Inc, has outlined 5 key reasons why energy stocks remain a buy despite oil prices failing to make any major gains over the past couple of months.
#1. Favorable Valuations
Energy stocks remain cheap despite the huge runup. Not only has the sector widely outperformed the market, but companies within this sector remain relatively cheap, undervalued, and come with above-average projected earnings growth.
Rosenberg has analyzed PE ratios by energy stocks by looking at historical data since 1990 and found that, on average, the sector ranks in just its 27th percentile historically. In contrast, the S&P 500 sits in its 71st percentile despite the deep selloff that happened earlier in the year.
Image Source: Zacks Investment Research
Some of the cheapest oil and gas stocks right now include Ovintiv Inc. (NYSE: OVV) with a PE ratio of 6.09; Civitas Resources,…