The recent sell-off in energy stocks has been primarily driven by recession concerns but shouldn’t be taken by investors as a sign to flee the space.
Despite the sell-off observed in the energy sector over the past month, the fundamentals of the midstream space are still very constructive, Stacey Morris, CFA, head of energy research at VettaFi, said yesterday in an interview with Proactive. “[Oil and natural gas] prices are still relatively strong, especially when you view them in the context of the last eight years or so,” Morris said.
Energy stocks and oil prices were at relative highs on June 8, but the landscape has shifted since then. The space began its sell-off in June; however, by mid-July, increased pressure on oil prices and natural gas prices entered the scene. Oil prices have fallen more than 20%, and energy stocks broadly have fallen about 25%, according to Morris.
“That commodity price pressure has also weighed on energy stocks even more, and a strong dollar certainly hasn’t been helpful for oil prices either,” Morris said. “So it’s mostly been recession concerns, but then as we’ve seen some weakness in commodities prices that’s weighed on the energy complex as well.”
Morris said it’s still a very constructive commodity price environment.
“I think we’ve had oil prices probably overshoot a little bit to the downside here and there’s just been a lot of volatility, and that volatility is likely to continue here in the near term. But fundamentally, I think things are still very strong, especially if you look at company level,” Morris said. “Energy companies across the board are generating strong free cash flow, they’re returning that cash to investors through buybacks and dividends. So while commodity prices have been very volatile, I think fundamentally things are still very constructive.”
There are a couple things that can help shift the momentum, including rebounding oil prices and the upcoming earnings season for the space. Morris said the earnings releases in the coming weeks are expected to show a strong quarter across the board for energy companies.
“I think earnings season will help refocus attention on the fundamentals for these companies, the cash flow they’re generating, their buyback activity, dividends that are being paid, and in some cases special special dividends, and I think that can help kind of shift the momentum that we’ve seen over the last month or so,” Morris added.
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