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NEW YORK, Dec 4 (Reuters) – Investors are gauging how far the rally in hard-hit energy stocks can go, as the recovery expected for the coronavirus-hit economy clashes with skepticism about the long-term prospects of fossil fuels.
Energy stocks as a whole jumped nearly 27% in November, leading the burden among sectors that are expected to benefit from the broad economic revival promised by boosting the development of multiple vaccines against COVID-19.
The long-term outlook for the sector, however, remains uncertain, as companies across the oil and gas supply chain face challenges from increasing use of “green” energy sources such as wind and solar. Another concern is the refusal among fund managers to invest in fossil fuel companies due to environmental concerns.
“It’s always difficult to be very bullish in a sector that is likely to experience a secular decline, and the traditional fossil fuel sector is very likely to experience a secular decline,” said Doug Cohen, portfolio manager at Fiduciary Trust International.
Coronavirus-related developments will continue to attract investors’ attention next week, as a US health advisory panel meets Thursday to discuss whether to recommend authorizing the emergency use of the vaccine developed by Pfizer Inc with German partner BioNTech SE.
The energy sector remains down 37% this year, even as a 13.5% gain has sent the S&P 500 to a new record. The drop in oil prices has caused energy stocks to underperform in the broad market since the Great Recession, and energy companies’ market value has shrunk to 2.4% of the S&P 500, down from more than 15% in 2008, according to Refinitiv Datastream.
November rocked that trend, as the release of positive data on three separate coronavirus vaccines from Pfizer, Moderna Inc and AstraZeneca Plc sparked a massive rally in company shares across sectors.
Oil companies Exxon Mobil Corp and Chevron Corp were up 17% and 25%, respectively, while Occidental Petroleum Corp jumped more than 72% and Devon Energy Corp jumped nearly 57%.
“The idea of an imminent vaccine gives some hope that oil demand may recover,” said Stewart Glickman, energy equity analyst at CFRA Research, adding that energy stocks will remain sensitive to news about a vaccine or coronavirus case in the near-term.
The hopes of an economic recovery have drawn a lot of attention to the hit sector. Goldman Sachs, Credit Suisse and Barclays in November all upgraded their ratings on the energy sector to market weight or neutral.
The sector is “the poster child for deep value,” said Savita Subramanian, head of equity and quantitative strategy at BofA Global Research, during its 2021 corporate outlook event. The company last month upgraded its rating on the sector from underweight to overweight.
The relatively high dividends from many energy stocks could also attract investors, said Robert Pavlik, senior portfolio manager at Dakota Wealth Management. Exxon’s dividend yield is 9%, Chevron is around 6% compared to 2% yield for the overall S&P 500.
However, many are concerned that energy stocks could weigh on portfolio performance in the coming years.
BMO Capital Markets rated the energy sector as underweight in the 2021 outlook, saying that forecasts for oil consumption in 2021 were “weak,” with demand likely to fall below levels in 2018 and 2019.
The long-term trend is also moving away from fossil fuels. Morgan Stanley expects renewable energy sources to account for about 45% of US electricity generation by 2035, more than double the current level.
So-called “sustainable” funds that use environmental or social criteria to select stocks continued to attract money at a record pace in the United States during the third quarter, taking nearly $ 10 billion from net new deposits, according to Morningstar.
Cabot Wealth Management, an investment advisor that manages $ 900 million, is moving away from oil and gas companies, said Chief Investment Officer Rob Lutts.
Instead, they own shares in companies that they believe would benefit from a push to alternative energy, such as solar power company and generator maker Generac Holdings Inc.
“I am a person who has the big picture, and the big picture is not good for fossil fuels,” Lutts said.
Reporting by Lewis Krauskopf; additional reporting by Scott DiSavino in New York and Ross Kerber in Boston; Edited by Ira Iosebashvili and Richard Chang