Fund Managers See Bottom, Buy Energy Stocks

After several false starts over the last two years, U.S. fund managers are betting that energy stocks have finally hit bottom.

    Firms including T. Rowe Price, Fidelity, and American Funds
have been adding shares of exploration and production companies
that they say have the most to gain from oil prices stabilizing.
The price of oil fell from $115 a barrel to $27.88 between June
2014 and January of this year, yet is up more than 50 percent
since hitting its low.
 

    The number of funds buying shares of ConocoPhillips (COP)
jumped 144 percent over the last three months compared with the
previous quarter, according to data from fund tracker
Morningstar (MORN). Occidental Petroleum Corp, meanwhile, had a
110 percent increase in new owners.
 

    "The E&P companies have taken the brunt of the pain that I
think they will see in their business, so they will go into
recovery faster and first," said Bill Costello, a portfolio
manager at Westwood who has been adding to his exposure of the
sector.
 

    Some companies in the sector, such as Marathon Oil Corp
 and Devon Energy Corp have plugged holes in
their balance sheets by selling assets and offering additional
equity shares to investors, he said, allowing them to withstand
a prolonged era of relatively low oil prices.
 

    The rush of fund managers to buy exploration and production
companies after several quarters of shedding them is one reason
why the sector is up 9 percent for the year to date, outpacing
both the 6.3 percent gain for energy stocks as a whole and the
1.8 percent gain in the broad Standard & Poor's 500.
 

    Overall, energy stocks remain the most underweight sector
among fund mangers, with the average large cap fund holding
approximately 1 percent less of its portfolio in the sector than
its weight in the benchmark index, according to Lipper data.
 

    Fund managers say that they are buying exploration and
production companies in part because they expect the oil glut to
dwindle this year as production halts begin to take effect,
setting up for a rally in revenue and earnings in 2017.
 
    "If you stop being negative on energy, you don't want to buy
a safe energy play, you want to buy a levered play," said
Ernesto Ramos, a portfolio manager at BMO Asset Management
Company, referring to EOG Resources (EOG), whose revenues are
closely tied to oil prices. Shares of the company are up 6.7
percent for the year to date, roughly half of the 14.6 percent
increase in oil over the same time.
 

    Overall, earnings among energy companies in the S&P 500 are
expected to fall 66.5 percent in 2016, before gaining 203.1
percent in 2017, according to Thomson Reuters data.
 

    The prospects of a revenue and earnings rebound over the
next two years is attracting growth-focused fund managers who
have typically shied away from the energy sector.
 

    Mike Pytosh, portfolio manager of the Voya MidCap
Opportunities fund, said that he shifted his energy
exposure during the January and February sell-off from
refineries to exploration and production companies that were the
hardest hit.
 

    "It certainly got to a point where it was oversold. You have
to not look at where the expectations are now, but where these
companies will be a year or two out," he said.

Reporting by David Randall