The S&P Energy Index, lagging the oil price rally, still has room to run, according to a JPMorgan Chase & Co strategist who called the energy stocks rally at the beginning of this year.
According to Bloomberg, Dubravko Lakos-Bujas was one of the lone energy stock bulls at the start of this year. But energy stocks have surged 50% since then.
And according to Lakos-Bujas, it isn’t over.
Oil prices have returned to pre-pandemic levels—and then some. In fact, oil prices are 25% above pre-covid levels. Brent prices were trading just under $67 in January 2020, but have rallied above $80 per barrel now.
Energy stocks, however, have failed to rally as much, still down 2% from the pre-covid era, and are trading at a near-record low relative to their book value.
“We expect the sector to re-rate as companies deliver strong results, raise guidance, and reiterate their focus on shareholder capital return rather than unprofitable market share gains,” Lakos-Bujas’ client note read on Thursday, according to Bloomberg.
“In a world where most assets have broadly re-rated due to lower rates and liquidity, energy still offers non-linear earnings growth potential for several years at an attractive valuation.”
JPMorgan sees years of underinvestment on low profitability and strict environmental policies cutting into supply—an issue that the coronavirus pandemic has exacerbated.
But now, the case for prolonged outperformance of the energy sector is upon us, JPMorgan strategists said.
By Julianne Geiger for Oilprice.com
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