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Oil stocks face crucial earnings test as investors venture back in

April 20, 2018/ 12:35

London. Formerly skeptical investors are buying back into oil majors in the hope that upcoming results will mark a turning point for energy stocks which have failed to keep pace with a surge in crude prices.

Oil stocks could begin to close that gap if results live up to lofty expectations, with Goldman Sachs predicting the strongest free cash flow figures in a decade for the sector.

Oil is the best-performing global asset this year, with Brent crude up 11.4 percent since January, but energy stocks have continued to lag the commodity. While Europe’s oil and gas sector .SXEP is the best-performing year-to-date, it still has a way to go to catch up with crude.

The gap between returns from Brent crude LCOc1 and from MSCI’s global energy index .MIWD0EN00PUS from the start of 2017 has widened to 25 percentage points.

For investors who put money on a revival in oil stocks a long time ago, the wait has been taxing, and baffling, reports Reuters.

“We had an overweight all through last year, it was horrendous,” said John Surplice, European equities fund manager at Invesco Perpetual.

“They underperformed the market even though fundamentals have improved quite dramatically. I struggle to answer the question why they’ve been so poor until the last few weeks,” he added.

The correlation between WTI crude and share prices has fallen from 90 percent in 2017 to just 36 percent so far this year, according to PVM analyst Tamas Varga, perhaps signaling investors’ lingering doubts about oil companies’ ability to translate higher crude into better shareholder returns.

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