Two weeks ago, I flew to my old stomping grounds in Houston and visited seven energy companies in three days. The mood around town and in corporate offices was far more upbeat than my last few trips down there, and not just because the Rockets were in the midst of pulling off one of the biggest comebacks in NBA playoffs history.
Despite what you might have heard, the oil business is rebounding.
While Wall Street has been preoccupied with terrible first quarter earnings for the energy sector and overreacting to every hint of negative news (as last Monday’s selloff shows), the price of West Texas crude has quietly risen 35 percent from its mid-March nadir:
Moreover, even as the Hughes rig count has collapsed, many exploration companies with low debt levels and ongoing production are still turning a profit. Those firms will almost certainly parlay higher crude prices into stronger results in the June and September quarters. Yes, earnings will be down year-over-year. We’re probably not going to see last year’s highs again for a little while, at least. But results will certainly be up versus the first quarter. That could catch market analysts by surprise.
The interesting part of this steady recovery is that very few people outside of Houston and other energy centers seem to be noticing it. Energy ETFs like XLE (shown below) have climbed along with oil prices, but their gains from March bottoms have generally been far more modest:
This underperformance isn’t just due to wariness among investors after crude’s steep fall last year, or continuing worries about oversupply. It’s the product of a built-in bias. While tech companies trade for enormous multiples of revenues (or even users), the coastal elites who make up so much of our investing class generally disdain traditional energy firms, even obviously undervalued ones. These folks love their high performance luxury cars, but they can’t tell the difference between a Lufkin pump and a drilling rig. Most of all, they want to believe an oil-free future is just around the corner. Guess what? It’s not. Yes, Elon Musk is a smart guy and he might be able to scale Tesla eventually. But the folks running our energy companies are smart, too, and even if Tesla does hit its ambitious sales goals, the vast majority of our transportation infrastructure is going to rely on oil for a long, long time.
The best time to buy straw hats, as the old Wall Street saying goes, is in the winter. As distasteful as it might be to many investors, now is probably the best time to be equal or even overweight energy in your portfolio. If you wait until second or third quarter earnings, it could be too late.
[note: this post originally appeared on my Yahoo! Finance contributor page.]
[charts source: y-charts]