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With oil prices falling, why are analysts bullish on Energy in 2015?

By John Butters, Senior Earnings Analyst
Jan 6, 2015

Despite declining oil prices over the past few months, industry analysts are most optimistic regarding the Energy sector in 2015, based on their current ratings and target price estimates. In terms of ratings, the Energy sector is tied with the Health Care sector for the highest percentage of Buy ratings (57%) of all ten sectors as of December 31. In terms of targets, the Energy sector currently has the largest upside difference (+16.9%) between the bottom-up target price ($685.03) and the closing price on December 31 ($586.59). Why are analysts bullish on the prospects for this sector?

The optimism does not appear to be based on current earnings and revenue growth expectations for 2015. In terms of earnings, the sector is predicted to report a decline of 19.2% in 2015, which is the largest estimated year-over-year decrease of all ten sectors. In terms of revenue, the sector is predicted to report a decline of 9.9% in 2015, which is also the largest estimated year-over-year decrease of all ten sectors.

Perhaps industry analysts believe the sector is undervalued heading into 2015. The forward 12-month P/E ratio for the sector is 16.6. This P/E ratio is above the forward 12-month P/E ratio for the S&P 500 (16.2) as a whole. It is also well above the 10-year average (11.9) for the sector. On a percentage basis, the forward 12-month P/E ratio for the Energy sector is 39% above the 10-year average (16.6 vs. 11.9). This is the largest upside percentage difference between the current P/E ratio and the 10-year average for all 10 sectors.

While oil prices have fallen in recent months, industry analysts may be optimistic on this sector due to the expected increase in the price of crude oil in 2015 relative to current prices. The current mean target price for crude oil (WTI) for 2015, based on estimates submitted by 85 analysts, is $76.33. This estimate is more than 50% above yesterday’s closing price for crude oil ($50.04). 

The table below lists the top 5 companies in the Energy sector in term of highest percentage of Buy ratings and largest upside differences between mean target price and closing price as of December 31. Schlumberger ranks #6 overall for highest percentage of Buy ratings in the entire S&P 500, while Range Resources (#1), QEP Resources (#3), EQT Corporation (#4), Southwestern Energy (#7), and Nabors Industries (#9) all rank in the top 10 in the entire S&P 500 for largest upside difference between mean target price and closing price as of December 31.

Do Analysts and Strategists Believe the S&P 500 Will Increase in Value in 2015?

After an 11.4% increase in value in 2014, do industry analysts and market strategists believe the S&P 500 will increase in value in 2015? The answer is yes. 

Industry analysts in aggregate predict the S&P 500 will see a 6.8% increase in price over the next twelve months. This percentage is based on the difference between the bottom-up target price and the closing price for the index at the end of December. Aggregating the mean target price estimates (based on company-level estimates submitted by industry analysts) for all 500 companies in the index, the bottomup target price for the S&P 500 is 2198.08, which is 6.8% above the closing price of 2058.90. 

Market strategists predict the S&P 500 will see a 3.6% increase in price over the next twelve months. This percentage is based on the difference between the top-down mean target price and the closing price for the index at the end of December. Taking the average of the nine index level target price estimates submitted to FactSet by market strategists, the top-down mean target price for the S&P 500 is 2133.00, which is 3.6% above the closing price of 2058.90. 

However, the top-down mean target price estimate at the end of December still included some individual target price estimates for 2014. Removing these 2014 estimates (or updating these 2014 estimates to 2015 when applicable), the average of the six index level target prices for 2015 is 2191.67, which is 6.4% above the closing price of 2058.90.

Based on this revised (for 2015 only) top down mean target price, it appears the industry analysts and market strategists have similar views on the expected increase in the value of the S&P 500 for 2015.

Read more about the targets and ratings of companies in the S&P 500 in this edition of FactSet Targets & Ratings. Visit www.factset.com/targetsratings to launch the full report.

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