As the year 2018 comes to an end, the S&P 500 Index looks set to close on a negative note. The benchmark has logged nearly 10% losses since the beginning of this year. While the sell-off has been blamed on myriad woes, including weaker earnings growth, U.S.-China trade war, Fed rate hike, government shutdown worries, slowing global economy, among others, oil prices, perhaps, remains the biggest worry.
Energy: The Worst Performing S&P Sector
Energy investors have taken it on the chin this year, as the Zacks Oil - Energy sector has now fallen almost 20%.
With WTI crude – the American benchmark – plunging to a 17-month low of $45.59 a barrel on Friday, it comes as no surprise that the sector dominates the S&P’s laggards list this year.
While crude has been a major drag on stocks, natural gas has fared much better. The heating fuel has seen big gains this year even with the commodity's recent pullback.
Let’s discuss the 2018 performance of oil and gas in more depth, plus what to expect in 2019.
Supply Side Woes Plague Oil Market
A steady increase in the price of U.S. oil over the last two years culminated in the benchmark popping above $76 per barrel in early October, the highest level in nearly four years. Supply-side shocks out of Iran, Venezuela and Libya in the face of growing global consumption levels — especially in emerging markets such as China and India — put the oil market in a fundamentally tight spot.
Now, in a stunning reversal, oil is facing a two-pronged attack: rising supply from major producers and fear that an economic slowdown will dampen the outlook for demand. Oil’s troubles helped send the index into a tailspin, leading to a 40% drop from recent highs. Even the OPEC-led supply cuts look unlikely to end the market surplus.
Global oil supplies are looking plentiful and are expected to outstrip demand at the beginning of 2019. Predictions of more crude coming to the supply side through record production in the United States have added to the bearish sentiment on the market. Even the demand side looks jittery with OPEC forecasting weaker consumption.
Natural Gas Supported by Robust Growth Narrative
Natural gas futures, which last month crossed the $4 per MMBtu mark for the first time in four years, returned attractive gains this year, and are trading significantly up in the year-to-date.
Prices are up around 30% since the start of the year as despite skyrocketing production, the current storage remains 20% below benchmarks.
Importantly, the fundamentals of natural gas continue to be favorable. The demand for cleaner fuels and the commodity’s relatively lower price has catapulted natural gas' share of domestic electricity generation to 35%, from 25% in 2011. Moreover, new pipelines to Mexico, together with large-scale liquefied gas export facilities have meant that exports out of the U.S. are set for a quantum leap. Finally, higher consumption from industrial projects will likely ensure strong natural gas demand.
Look for Bargain Buys with Strong Fundamentals
Under the circumstances, oil and gas prices might continue to move in opposite directions through early 2019. If investors are eager to lap up opportunities in this volatile and speculative sector, a prudent move would be to buy the beaten-down stocks with encouraging fundamentals. Stressed valuations do not always indicate that the stock has lost all potential. In fact, some could actually make a great buy. But prospective investors need to do adequate research before betting one’s hard-earned money on such stocks.
To guide investors to the right picks, we highlight five stocks that carry a Zacks Rank of #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Finally, the stocks, which we shall cherry-pick, currently come at a bargain price after declining more than 20% so far this year, but have the potential to turn around in 2019.
5 Stocks to Invest In
Unit Corporation (UNT - Free Report) : It is an integrated energy company with operations including exploration and production, midstream gathering and processing, and a drilling rig business. The Tulsa, OK-based stock, which currently carries a Zacks Rank #1, has an expected earnings growth of 64.7% for the next year. Over 60 days, the company has seen the Zacks Consensus Estimate for 2019 increase 44.6%. We note that the stock has plunged 36.8% so far in the year.
Cabot Oil & Gas Corporation : It is engaged in high-impact natural gas-focused drilling in the Marcellus Shale. The Houston, TX-based stock, which currently carries a Zacks Rank #2, has an expected earnings growth of 63.4% for the next year. Over 60 days, the company has seen the Zacks Consensus Estimate for 2019 increase 15.2%. We note that the stock has plunged 20.2% so far in the year.
SilverBow Resources, Inc. (SBOW - Free Report) : This Houston, TX-headquartered oil and gas explorer — focused on the Eagle Ford shale located in South Texas — also has a Zacks Rank #2. The company has an expected earnings growth of 67.3% for the next year. Over 60 days, the company has seen the Zacks Consensus Estimate for 2019 increase 18.5%. We note that the stock has plunged 26.1% so far in the year.
Archrock, Inc. (AROC - Free Report) : Archrock is a leading player in the natural gas compression and transmission business. The Houston, TX-based company has an expected earnings growth of 48.2% for the next year. Over 60 days, the Zacks Rank #2 company has seen the Zacks Consensus Estimate for 2019 increase 3.8%. We note that the stock has plunged 26.8% so far in the year.
TransCanada Corporation (TRP - Free Report) : Calgary, Alberta-based TransCanada is primarily focused on natural gas transmission through its 57,100-mile network of pipelines located in Canada, the United States, and Mexico. The company has an expected earnings growth of 3.4% for the next year. Over 60 days, the Zacks Rank #2 company has seen the Zacks Consensus Estimate for 2019 increase 5.4%. We note that the stock has plunged 24.4% so far in the year.
In addition to the stocks discussed above, would you like to know about our 10 top tickers to buy and hold for the entirety of 2019?
These 10 are painstakingly handpicked from over 4,000 companies covered by the Zacks Rank. They are our primary picks poised to outperform in the year ahead. Be among the first to see the new Zacks Top 10 Stocks >>