With this in mind, we acknowledge there is the potential for weakness in energy shares in the near term if oil prices remain under pressure, especially if WTI holds below US$80 per barrel. But we would use the selloff as a buying opportunity because we believe the longer-term picture remains bullish.Article content
As a result, we would classify the energy sector as trading below average from a valuation perspective whereas the broader market still looks too richly priced for our liking . With the U.S. Federal Reserve continuing to remove liquidity, we see the greatest downside in high-multiple segments of the market whereas cheaper areas are likely to fare better.
What this has meant is that even with the increase in the share prices of energy names, the boost to earnings estimates has been even larger. From our standpoint, this indicates the rally in energy stocks has been entirely supported by improved fundamentals, as opposed to lower-quality rallies that are driven by speculation.Article contentEnergy companies have made returning cash to shareholders — via dividends and buybacks — a primary focus, which investors are increasingly rewarding .
Not only that, but there are other potential catalysts that could result in additional upward pressure on prices including, notably, the Russian oil price cap , a further escalation in the Russia/Ukraine war and China pivoting away from its Zero COVID-19 policy.