Investment

Chart of the Month – Conversation with an energy L/S portfolio manager

by Alexis Sautereau

Conversation with an energy L/S portfolio manager

Source: UBS

The Global Energy Sector is still very cheap vs history – which differs from the broader market (charts below which compare relative valuations between different sectors and the broader market, Energy is still trading at 11.8x P/E, a discount to historical averages vs. the broader market trading at ~20x, a premium).

So potentially plenty of room for relative multiples to normalize value vs. growth, especially given the focus from energy management teams on return on and return of capital (the space is set to see >20% ROCE over the coming years, which competes with any market sector, as well as in some cases double digit return of capital yields). This compares to other ‘stimulus driven’ sectors where there is a pull forward of demand – ie, cons discretionary and info tech which are still elevated vs. historical valuations.

The chart below illustrates Energy Market Cap as percent of S&P, still close to the lows: 4% vs. 20 year average of 8%. This shows the degree of valuation disconnect vs. both historical measures and the broader market.

 

 

 

 

 

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