If the price of oil hangs around current levels in perpetuity, there won’t be much value in the oil and gas sector for investors, according to Doug Leggate, head of U.S. oil and gas equity research for Bank of America Merrill Lynch Global Research. But recent prices in the neighborhood of $50 to $60 a barrel are not sustainable, Leggate predicts, creating a rare opportunity to benefit from the rebound.
“We are bullish on the energy sector,” said Leggate, who has been ranked among the top energy analysts in the world by Institutional Investor magazine and spoke today at a downtown luncheon hosted by Merrill Lynch Wealth Management.
So what’s going to drive prices back up? Right now, the oil and gas industry is cutting back production, but demand continues to grow, thanks in part to current cheap prices. That dynamic could lead to a significant price increase.
“If you don’t fund the investment to meet incremental demand growth, you’re going to end up with a spike in the oil price,” Leggate said
Leggate says the industry got used to OPEC nations keeping the oil price stable. While he doesn’t completely discount the popular theory that OPEC is keeping oil prices low to damage U.S. shale production, he notes that OPEC nations are hurting in the current environment.
“What happens if OPEC cuts production [to raise the price]?” he said, speculating investors who aren’t in oil when that happens will have missed out on perhaps the best buying opportunity in five years.
But while Leggate is confident oil prices will increase, he’s not sure when, which means buying stocks of companies that don’t have strong enough balance sheets to ride out near-term uncertainty remains risky. Conversely, Leggate’s group recently upgraded ConocoPhillips, Apache and Marathon Oil.
“We’re still not going crazy and owning stuff that could have a problem if we get the timing wrong,” he said. “But we’re really trying to play in that middle ground,” getting in position to benefit from what’s coming without “betting the farm.”
—David Jacobs
