Now that oil prices have bottomed out is it time to buy oil stocks or are there still oil companies that are overpriced? In general, energy stocks have taken a beating and are trading at levels appropriate for current oil prices. The exceptions are a group of Canada oil stocks. Bloomberg reports the story.
Canadian energy companies are trading at record valuations, signaling their shares haven’t caught up to the reality of crude oil’s continued decline.
Suncor Energy Inc., Canadian Natural Resources Ltd. and other stocks in the Standard & Poor’s/TSX Energy Sector Index are priced at 65 times expected earnings, an all-time high and more than double the average of U.S. peers, according to data compiled by Bloomberg. Those valuations sit in contrast to crude, which touched $42.03 a barrel for the U.S. benchmark last week, the lowest since March 2009.
As surging crude output strains storage facilities and pushes prices down in the U.S., Canadian producers are cutting thousands of jobs and reducing spending to weather the rout. High valuations suggest that might not be enough to help support earnings which are projected to drop 24 percent for the group in the second quarter from the first, according to data compiled by Bloomberg.
It seems obvious that these stocks are overpriced, but what do investors in and traders of these stocks know that the rest of the market does not?
The Crack Spread
Value walk offers an opinion about undervalued oil stocks.
Even though everything related to oil sold off, there is one group in the oil sector that has differentiated itself - oil refiners. That’s because instead of it being an even match, there is a spread in the market that is stacking the odds in the refiners’ favor … and now is the time to jump in.
It’s known as the crack spread - the difference between the price of crude oil and the refined oil product (like gasoline). This is basically what sets the tone for oil refiners’ profit margins as they sell the refined oil for a higher price than the crude.
As the price of oil fell, oil refiners fell right alongside them because the crack spread tightened. But that has started to change dramatically in March. While crude oil has slipped to new 52-week lows, prices at the pump haven’t followed suit. In fact, the national average for a gallon of gasoline today sits around $2.40, compared to an average of just $2.03 earlier this year. That’s a significant tailwind for oil refiners.
It would appear that there are profit centers in the oil industry that are pumping out money even while the overall picture would seem to be bleak. Is it time to buy oil stocks? Maybe the answer is yes if the company is a refiner.
The Long Term
If you interest lies in investing as well as trading you may be considering what bargains to pick up in the energy sector now that prices are at historic lows. Motley Fool poses an interesting question about drillers or pipelines as long term cash cows.
The energy sector has gone through a huge amount of turmoil in recent months, as plunging oil prices have put some companies in jeopardy of suffering through a painful period of losing money. Drillers have taken the biggest immediate hit, being the most directly affected by falling prices. But some investors also worry about the prospects for pipeline companies, especially if dramatic production cuts reduce the need to transport energy products.
As with all investing and trading working out the dollars and cents helps create substantial gains.
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