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Future of Fossil Fuels Looms Over Energy Stock Rally

Future of Fossil Fuels Looms Over Energy Stock Rally
(Maythee Voranisarakul/Dreamstime)

Friday, 04 December 2020 08:36 AM

Investors are gauging how far a rally in beaten-down energy shares could run, as an expected recovery for the coronavirus-hit economy clashes with skepticism about the long-term prospects of fossil fuels.

Energy shares overall soared nearly 27% in November, leading the charge among sectors expected to benefit from the broad economic revival promised by encouraging developments for several vaccines against COVID-19.

The longer term outlook for the sector, however, remains uncertain, as companies throughout the oil and gas supply chain face challenges from the increasing use of "green" energy sources such as wind and solar. Another concern is resistance among fund managers to investing in fossil fuel companies over environmental concerns.

"It's always hard to be extremely bullish on a sector that is likely in secular decline, and the traditional fossil fuel sector is very likely in secular decline," said Doug Cohen, a portfolio manager at Fiduciary Trust International.

Coronavirus-related developments will continue to draw investor attention next week, as a U.S. health advisory panel meets Thursday to discuss whether to recommend emergency use authorization of a vaccine developed by Pfizer Inc with German partner BioNTech SE.

The energy sector remains down 37% this year, even as a 13.5% rise has sent the S&P 500 to fresh records. Declining oil prices have seen energy stocks underperform the broad market since the Great Recession, and the market value of energy companies has shrunk to 2.4% of the S&P 500, down from over 15% in 2008, according to Refinitiv Datastream.

November rattled that trend, as the release of positive data from three separate coronavirus vaccines from Pfizer, Moderna Inc and AstraZeneca Plc sparked massive rallies in the shares of companies across the sector.

Shares of oil majors Exxon Mobil Corp and Chevron Corp rose 17% and 25%, respectively, while Occidental Petroleum Corp soared over 72% and Devon Energy Corp surged nearly 57%.

"The notion of a vaccine being sometime around the corner gives some hope that oil demand may recover," said Stewart Glickman, energy equity analyst at CFRA Research, adding that energy shares will stay sensitive to news about vaccines or coronavirus cases in the near-term.

Hopes of an economic rebound have drawn plenty of attention to the battered sector. Goldman Sachs, Credit Suisse and Barclays in November all upgraded their ratings on the energy sector to market-weight or neutral.

The sector is "the poster child for deep value," Savita Subramanian, BofA Global Research's head of U.S. equity and quantitative strategy, said during the firm's 2021 outlook event. The firm last month lifted its rating on the sector from underweight to overweight.

The relatively high dividends of many energy stocks also could draw investors, said Robert Pavlik, senior portfolio manager at Dakota Wealth Management. Exxon's dividend yield is 9%, Chevron's is about 6% compared to a 2% yield for the overall S&P 500.

Still, many are worried that energy stocks could weigh on portfolio performance in the years ahead.

BMO Capital Markets rated the energy sector as underweight in its 2021 outlook, saying that forecasts for oil consumption in 2021 are "subdued," with demand likely to drop below levels in 2018 and 2019.

Longer-term trends are also pointing away from fossil fuels. Morgan Stanley expects renewable energy sources to amount to about 45% of U.S. power generation by 2035, more than double their current level.

So-called "sustainable" funds using environmental or social criteria to pick stocks continued to draw money at a record pace in the United States during the third quarter, taking in nearly $10 billion of net new deposits, according to Morningstar.

Cabot Wealth Management, an investment advisor which manages $900 million, is staying away from oil and gas companies, said Chief Investment Officer Rob Lutts.

Instead, the firm owns shares of companies it believes will benefit from a push to alternative energy, such as solar firms and generator maker Generac Holdings Inc.

"I am a big picture guy, and the big picture is not good for fossil fuel," Lutts said.

© 2021 Thomson/Reuters. All rights reserved.


StreetTalk
Investors are gauging how far a rally in beaten-down energy shares could run, as an expected recovery for the coronavirus-hit economy clashes with skepticism about the long-term prospects of fossil fuels.
energy, stock, rally, investors
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2020-36-04
Friday, 04 December 2020 08:36 AM
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