Rising oil prices could help energy stock earnings

NEW YORK (Reuters) - U.S. energy stocks have been jolted awake in the last few weeks, as crude oil prices have doubled, helping to hold up a stock market that has meandered about for the better part of the month.

After crashing from a record high last July around $147 a barrel to a low around $32.40 a barrel in December, benchmark crude oil prices have recovered to around $70 a barrel recently, as a global economic recovery began to seem more likely.

And since May 18th, oil prices have gained about 25 percent. Energy stocks .GSPE gained 4.5 percent during that time, while the S&P 500 .SPX rose 3.1 percent, led by resource and technology shares.

The hope, according to investors, is that the rise in oil prices boosts the earnings potential in the sector, which has been one of the poorer-performing sectors in terms of earnings in recent quarters.

But this will take time. Earnings expectations for the sector seem based on a U.S. crude oil price of about $49 a barrel, said strategists at Bank of America-Merrill Lynch, in a research note.

“Changes to estimates for the energy sector tend to lag oil price changes, as consensus generally catches up to price changes over the subsequent few months,” Merrill Lynch strategists said in a research note.

“History suggests a 10 percent change in oil prices equates to a 4.0 percent change in energy expectations three months forward,” they wrote.


Before the fourth quarter of 2008, energy had been a top earnings performer, helping to fuel some 18 quarters of double-digit profit growth in the benchmark S&P 500 index .SPX.

But as oil prices slumped after hitting a record of $147.27 in July 2008, earnings fell also. Energy contributed just 1.3 percent of the S&P’s earnings in the first quarter, compared with 23 percent a year ago, said Howard Silverblatt, analyst at Standard & Poor’s.

Slowly, analysts have been boosting their outlook for energy stocks. At the moment, earnings estimates for the second quarter show energy sector profits down 66 percent compared with a year ago, compared with expectations for a 35.7 percent year-over-year decline in earnings for the entire S&P 500.

Thomson Reuters estimates show energy profits increasing 45 percent in the first quarter of 2010.

The ratio of increases to cuts in energy earnings estimates over the past four weeks is about even, said Dirk Van Dijk, Zacks Investment Research in Chicago. It’s improved dramatically from earlier this year, when there were about four cuts for every increase in energy estimates, he said.

Before that, “we had some weeks in excess of 10 cuts for every increase. Now it’s kind of a wash,” he said.

“If we continue to see oil prices stay up near the $70 mark, I would be pretty shocked if we did not see more analysts raising their estimates,” Van Dijk said.

Ultimately, this will depend on whether oil prices stabilize at this level, or retreat to lower levels. Many see the former. Signs of worldwide economic recovery support expectations for increased demand.

Investment bank Goldman Sachs last week raised its boosted its year-end forecast for oil to $85 a barrel from $65, and gave an end-of-2010 forecast of $95, saying the global recovery will push demand for fuels.

“We’ve been bullish on energy and oil all year,” said Fred Dickson, director of retail research at D.A. Davidson & Co. Lake Oswego, Oregon. He said a global recovery will help sectors with international exposure, including energy companies.

“Global economies are starting to wake up, the China dragon is alive and business is starting to awaken there,” Dickson said.

The Organization of Petroleum Exporting Countries’ decision in 2008 to cut supply has contributed to higher prices, and in the short-term, the onset of the U.S. summer driving season augers for an upturn in gasoline demand.

“You tend to see an increase in oil demand over the summer. I would be surprised if oil prices don’t keep going higher, and you’ll probably see energy stocks go higher, too,” said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.

Reporting by Caroline Valetkevitch