April 25, 2018 / 5:03 PM / in 3 months

U.S. energy shares outperform as companies begin to report

NEW YORK, April 25 (Reuters) - After losing ground and underperforming the broad market in 2017, U.S. energy shares are climbing fast with oil prices and gaining attention from investors who think the trend may hold.

Oil prices are near their highest since late 2014 thanks to strong demand and supply cuts by the Organization of the Petroleum Exporting Countries (OPEC) and other producers including Russia. This will support energy earnings growth, investors and strategists say, particularly for companies involved in exploration and production.

Forecasters expected first-quarter earnings for the sector would be up about 69 percent from a year ago, the highest percentage gain of any S&P 500 sector, according to Thomson Reuters data. The exploration and production group was projected to have the biggest year-over-year increase.

Energy stocks in the S&P 500 are up 7.5 percent since the start of April, compared with a 0.4 percent decline in the overall S&P 500.

Results from energy companies this earnings season could put recent share gains to the test. The big integrated names, Exxon Mobil and Chevron are due to report results Friday, while ConocoPhillips is due Thursday along with and refiner Valero Energy. Results from Apache, more focused on exploration and production, are due next week.

Energy shares in general have not caught up with rising oil prices. U.S. West Texas Intermediate crude futures were trading around $68 a barrel, up about 4 percent for the month so far and roughly 12 percent year to date.

"The stock prices are still not reflecting the earnings power that's likely to show up here in this quarter and for the year as a whole," said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management, which has been overweight the energy sector.

"Energy prices are more than likely to stabilize here between the $60 and $70 range as opposed to the prior range of $50 to $60."

The S&P energy index, despite its recent sharp gains, is up just 0.5 percent since Dec. 31.

In 2017, the energy index declined 3.8 percent versus a 19.4 percent gain in the S&P 500.

Other investors are recommending ways to bet on energy.

At the Sohn Investment Conference in New York this week, billionaire investor Jeffrey Gundlach said investors should consider a trade that includes betting on gains in an exchange-traded fund that tracks oil and gas explorers and producers who could benefit from rising inflation.

To be sure, oil prices can be volatile, and prices have risen enough to worry some government and business leaders that energy costs could crimp economic growth. U.S. President Donald Trump on Friday said OPEC had sent prices to levels that were "artificially Very High!" This led to a brief dip in oil prices.

Also, the jump in energy shares has driven up the sector's valuations, though some strategists say levels are not worrisome yet.

Lori Calvasina, head of U.S. equity strategy for RBC, said in a recent note the sector "continues to be in the middle innings of a rotation back in," and that "valuations don't worry us."

With the recent price gains, energy sector multiples are above those of the overall S&P 500.

The S&P 500 energy sector is trading at 19.6 times forward earnings, compared with 16.5 times for the S&P 500, based on Thomson Reuters data.

RBC Capital Markets reiterated its "overweight" recommendation first made in January, while Credit Suisse upgraded its recommendation on energy to "market weight" from "underweight" last month, and its strategists cited strong earnings growth along with a robust global economy as factors.

Shares of early reporter Hess Corp, an E&P company, rose 1.8 percent on Wednesday after it reported a smaller-than-expected quarterly loss, thanks to expense cuts and the rise in oil prices. (Reporting by Caroline Valetkevitch; Editing by Alden Bentley and David Gregorio)

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