NEW YORK (Reuters) - With nearly a quarter of U.S. energy shares' value wiped out by oil's six-month slide, investors are wondering if the sector has taken enough punishment and whether it is time to pile back in ahead of earnings reports later this month.
The broad energy S&P 1500 index gained more than 4 per cent over the past month, suggesting many believe markets have already factored in the pain caused by oil prices tumbling by more than half since June below US$50 (S$67) a barrel.
Yet since the start of this year, most energy stocks have given up some of those gains, revealing anxiety that some nasty surprises might still be lurking somewhere and that last month's bounce may not last.
A closer look at valuations and interviews with a dozen of smaller firms ahead of fourth quarter results from their bigger, listed rivals, shows there are reasons to be nervous.
What small firms say is that the oil rout hit home faster and harder than most had expected. "Things have changed a lot quicker than I thought they would," says Greg Doramus, sales manager at Orion Drilling in Corpus Christi, Texas, a small firm which leases 16 drilling rigs. He talks about falling rates, last-minute order cancellations and customers breaking leases.
The conventional wisdom is that hedging and long-term contracts would ensure that most energy firms would only start feeling the full force of the downdraft this year.
The view from the oil fields from Texas to North Dakota is that the pain is already spreading.
"We have been cut from the work," says Adam Marriott, president of Fandango Logistics, a small oil trucking firm in Salt Lake City. He says shipments have fallen by half since June when oil was fetching more than US$100 a barrel and his company had all the business it could handle.
Bigger firms are also feeling the sting.
Last week, a leading U.S. drilling contractor Helmerich & Payne reported that leasing rates for its high-tech rigs plunged 10 per cent from the previous quarter, sending its shares 5 per cent lower.
The apparent disconnect between energy stocks' recent recovery and the furious cuts in Wall Street's earning estimates could also be a sign that the sector's 24 per cent plunge since June may not fully reflect how ugly it can still get.
Thomson Reuters data shows Wall Street brokerages slashed their fourth quarter estimates for energy firms by over 7 per cent in the past 30 days. They now predict earnings of S&P 500 energy firms to fall 20.7 per cent in the fourth quarter and by 36.1 per cent this quarter.
The price-to-earnings ratio based on estimates for the next 12 months for S&P 500 energy stocks is around 17, more than 16.3 for the whole S&P 500 index and above the sector's 12.5 figure based on reported results, according to Thomson Reuters data. This suggests that either investors bet on a rebound in oil analysts do not see or they risk getting disappointed when the results come out.
