Energy prices may be falling and the “global economy has been in the toilet,” but Raymond James Energy analysts believe energy stocks are at the bottom of a cyclical downturn, and as “strong commodity fundamentals” become visible in the first quarter,” the stocks will begin to rise again. In the Stat of the Week Monday, the analysts noted that balance sheets are stronger, the industry has consolidated and absolute energy prices are “meaningfully higher today” than they were in the last downturn in 1999.

According to the analysts, the oil service index over the past year and a half has tracked “remarkably” closely with the oil service index from late 1997 through early 1998. However, “we believe the fundamental drivers of the cyclical downturn of 1998/1999 are far different from the drivers of the recent oil service downturn.” To begin with, they said, “energy supply/demand (particularly for natural gas) is much tighter today than it was several years ago…Because today’s fundamental drivers are different from several years ago, we believe investors may not have the second chance to buy oil service stocks again at the late September discount prices.”

The cycle today is actually similar to that of the early 1970s, said Raymond James analysts. “From the beginning of 1972 to the end of 1973, oil service stocks experienced a phenomenal two-year run that coincided with a meaningful ramp-up in oil prices. By late 1973, the energy price run-up had triggered an economic recession and a subsequent market sell-off.” As they noted, the 1970s was a “great time to invest in energy stocks,” but it “did not occur without meaningful cyclical downturns.”

Analysts noted that if investors bought in the 1973 peak, their stocks would have been “underwater” for more than a year and a half as “the group struggled” through a downturn. However, if investors had bought at or near the cyclical bottoms over the course of the decade, then they “could have traded for tremendous returns.”

Said Raymond James analysts, “recent energy investment sentiment could be characterized as fear-driven cautious psychology that has led to a generally under-owned condition for most energy stocks…in other words, we believe the energy stocks are near the bottom of a cyclical downturn within what we believe is going to be a longer-term secular upswing. That means now is the time to be buying energy stocks.”

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