US Energy Sector:Opportunities in the E&Ps

Mar 05, 2018

Is it safe to say that the days of record low prices for crude oil are long gone? Production cuts from OPEC have stabilized global crude oil prices ~USD$60/barrel for the short-run. Now that global crude oil prices are stabilizing, where can investors and traders invest in energy?

Investors may want to consider US E&Ps given that total cash break-even costs for US shale E&Ps are estimated to be ~USD$40/barrel based on internal research at Quantamize. Forward multiples for the US Energy Sector look attractive with the S&P 500 energy sector trading at a Fwd 12M P/E of 15.5x with an expected annual EPS growth rate of 30+% for the next 3-years; this translates to a PEG ratio of 0.5x which means the forward 12-month multiple investors are paying for forward earnings is at a discount to the rate of growth for future earnings.

Over the past few weeks, Quantamize has highlighted a few attractive options trades in the US energy space: XOP (US E&Ps ETF) Bull Call Spread and a SLB Bull Put spread.  When Quantamize highlighted the Bull SLB Put Spread, 1-month implied volatility for SLB was implying a 5-standard deviation downside move. In comparison, SLB is a top name in our US Large-cap Multi-Factor Quant model.

Investors and traders may want to consider future opportunities in the US energy sector given that valuations remain cheap while the prospects for the sector are improving sequentially.