• E-mail
• Print
• Comment
• Font Size
• Digg
• del.icio.us
• Discuss article

Energy Stocks Soar 40 Percent in Third Quarter

Posted on: Monday, 3 October 2005, 15:00 CDT

By Aldo Svaldi, The Denver Post

Oct. 2--Rising energy stocks are among the few gifts an otherwise stingy stock market is giving investors.

The Standard & Poor's 500 Energy Sector Index is up 40 percent through the end of the third quarter. That compares with only a 1.4 percent gain in the S&P 500 as a whole. Individual energy stocks have been on a tear, with independent refiners Valero Energy Co. up 150 percent and Frontier Oil up 234 percent.

Colorado stocks and mutual funds have enjoyed the gains from energy as well. The Bloomberg Colorado Index, a basket of Colorado-based stocks with a heavy energy concentration, is up 13.8 percent. The ICON Energy Fund, the state's best-performing mutual fund, is up about 45 percent.

That said, has energy seen its best days or are there more quarters of gains ahead?

"Barring another supply disruption, we have seen the peak in oil prices and probably natural gas, too," said John Keller, president of investment firm Corinthian Capital in Denver. "You should be pretty careful here in terms of pursuing this." Keller, who ran a refinery before becoming a money manager, argues that current commodity prices reflect a spike from Hurricanes Katrina and Rita and are due for a fall. If prices do fall, energy stocks will follow.

High energy costs are destroying demand, even causing car-loving Americans to drive less, Keller said. At the same time, oil and gas producers face skyrocketing costs for everything from drilling rigs to roughnecks.

Keller has lightened his energy holdings.

"Everybody is bullish on oil. It is the only thing that has worked this year," said Keller. "Any time the boat gets that loaded to one side, you should lean the other way." But other market watchers argue the sector still offers opportunities for investors who pick carefully.

"The basic concept of oil demand outpacing oil supply looks intact," said Mike Gardner, an energy analyst and portfolio manager with Cambiar Investors in Denver. "The question at this point is valuation of the stocks." If oil, which closed at $65 a barrel Friday, can hold $50 to $55 a barrel or better, then energy stocks don't look that expensive, Gardner said.

Joseph Janiczek, president of Janiczek & Co., a wealth management firm in Greenwood Village, said, "Energy is something we continue to overweight, and commodities as a whole." Demand from China and India in particular has driven energy prices higher, and their economies don't show any signs of going into a recession.

Energy stocks also haven't dominated the market in terms of their valuations, as technology did in the late 1990s.

The energy sector represented only about 6 percent of the total valuation of the S&P 500 two years ago, said Fred Taylor, a money manager with Northstar Investment Advisors in Denver. Today it stands closer to 9.5 percent with some analysts projecting it could rise to 15 percent of the S&P 500's total value. Energy represented 35 percent of the value in the S&P 500 in 1980, the last time energy had a big peak.

"We have more room to go, but there might be other places within energy with higher potential," said Brian Kuzma, a research associate with RBC Dain Rauscher in Houston.

Companies specializing in natural gas might do better than oil producers in the short term, given supply disruptions from the hurricanes and the onset of cooler temperatures. The weather, even tougher to forecast than the stock market, will be a key factor to watch.

It also can pay to think of energy resources beyond oil and gas. Taylor's best stock this year has been Peabody Energy, a St. Louis coal producer that has risen 108 percent this year on higher demand for coal from China.

Firms that deal with energy infrastructure and support services might do better than those producing the commodity, adds Michael Englund, chief economist with Action Economics LLC in Boulder.

"It will be a very supply-constrained industry," he said.

That is especially true in petroleum refining. The U.S. hasn't seen a new refinery come online since 1976. Building one from scratch now could take four or five years, Kuzma said.

Kuzma forecasts more moderate gains of 10 percent for petroleum exploration and production companies next year. That's tamer than this year, by far, but it will likely remain enough to beat the overall market.

And those who sell energy holdings now will have to figure out where to put the proceeds, something Keller has struggled with. Ever the contrarian, Keller is looking at trucking companies, which should benefit if diesel prices fall.

"We are not seeing too many opportunities," Keller said.

-----

To see more of The Denver Post, or to subscribe to the newspaper, go to http://www.denverpost.com.

Copyright (c) 2005, The Denver Post

Distributed by Knight Ridder/Tribune Business News.

For information on republishing this content, contact us at (800) 661-2511 (U.S.), (213) 237-4914 (worldwide), fax (213) 237-6515, or e-mail reprints@krtinfo.com.

VLO, FTO, RY, BTU,

Source: The Denver Post

More News in this Category