Despite the run-up in global oil & gas stocks, the case supporting a continued long position remains solid.
The trend in the ratio of global energy equities to the oil price is upward sloping over time, due to productivity gains and volume growth. Currently, this ratio is well below the level suggested by the trend since 1985. Moreover, oil & gas stock valuation multiples are low—a metric which adjusts the trailing P/E ratio for the level of interest rates is significantly below its historical average. The implication is that global oil & gas stocks are cheap, not just relative to the broad market but relative to bond yields as well. And, as outlined in an April 7th Insight, an upgrade in analyst earnings expectations looms, which should provide a boost. Bottom line: the prevailing cautious sentiment surrounding global oil & gas stocks has kept valuations attractive, and we recommend clients stay long.
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