June 5, 2014: Why Isn’t the Price of Crude Oil Lower ?



Energy is about 10% – 11% of the SP 500 by market cap. The sector p.e is roughly 16(x) forward earnings, with expected growth of 9.7% this year and 6.3% next year. Per Bespoke, about 90% of the sector is trading above its 50-day moving average, and in my opinion the sector is overbought.

The above two articles, the first being from the first quarter, and the 2nd found on Briefing.com from the middle of May, indicate that the supply of crude seems to be plentiful. The Obama Administration is even thinking about lifting the ban on crude oil exports, as US domestic production of crude oil and natural gas has soared.

So why isn’t the price of crude lower ? Sure puzzles me.

Here is the history and current expected earnings growth for the Energy sector, per Thomson Reuters:

Full-year 2015: +6.3% (est)

Full-year 2014: +9.7% (est)

q1 ’15: +5.5% (est as of 5/30/14)

q4 ’14: +10.2% (est)

q3 ’14: +14.3% (est)

q2 ’14: +12.4% (est)

q1 ’14: -0.4% (est, with most, if not all, of Energy sector having reported q1 ’14 already)

q4 ’13: -8.8% (actual)

q3 ’13: -7.5% (actual)

q2 ’13: -8.5% (actual)

q1 ’13: +0.5% (actual)

q4 ’12: +6.4% (actual)

As the reader can quickly see Energy is coming out of a period of negative earnings growth, and over the rest of ’14 will likely see nice earnings growth within the sector. However the q1 ’14 estimate of +5.5% has already been cut in half from its April 1 ’14 estimate of +9.7%.

We are underweight Energy expecting a correction in the sector, and it hasn’t happened. Energy has performed well for 2014 year-to-date. Our largest holding is Halliburton, currently trading near $65, with an intrinsic value estimate near $70 per share.

Barron’s ran a front-page article a couple of months ago, detailing that the price of a barrel of crude oil could drop to $80. I agreed with that assessment.

For me, living in Chicago and watching the emerging plethora of natural-gas powered cars, cabs, and hybrid vehicles of all types, I cant believe this trend is anywhere close to stopping. One stat I’ve read from a credible source thought that gasoline distillation drives about 50% of the crude oil demand (again, I haven’t confirmed that statistic), and with the growing emergence of the Tesla’s, hybrid’s and other alternative fuel vehicles I cant believe that the slope for gasoline demand is anything but negative over the next 10 years.

We (Barron’s and myself) both have clearly been wrong.

After Halliburton, our other energy position is Peabody Energy (BTU) which is the coal company, only bought because of the plethora of negative headlines and sentiment surrounding the name, and the free-cash-flow yield of 7%.

We are continuously reassessing our sector and individual position weights. Our underweight in Energy has not helped us this year.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager








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