Picking bargains in the oil patch

Here's where to look for value as the energy sector recovers.

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Oil prices have risen since last year's plunge as economies recover and energy inventories shrink. That's creating opportunities for investors in energy companies but also makes it harder to determine whether their stocks still represent good values.

“And even after a roughly 35% rally for energy stocks in the last 2 months of 2020, I’m still seeing historic values in the sector, especially among the stocks of certain shale-related companies that aren’t industry pure-plays,” says Peter Belisle, portfolio manager of Fidelity® Select Natural Gas Portfolio (FSNGX).

Belisle notes that independent oil stocks, like many other energy names, remain exposed to decarbonization trends that could weigh on their fundamentals longer term.

Still, he contends that many stocks in the sector, especially exploration & production (E&P) names, trade at a steep historical discount, based on his expectations for free cash flow in 2021 and 2022.

Within the group, he sees the most value among a handful of firms that maintain strong positions in conventional oil plays outside of US shale.

For this reason, Belisle says, at year-end the fund carried a sizable stake in Hess (HES), a mixed producer that owns US-based shale assets, as well as offshore assets, including off the coast of Malaysia and South America—the latter of which he thinks could be poised to expand output.

Similarly, the fund owned shares of Apache (APA), which, in addition to its US shale assets, has drilling rights off the coast of Suriname in South America, based on its partnership with Paris-based Total SE (TOT).

Belisle adds that the fund held Occidental Petroleum (OXY), an integrated oil & gas company with US shale production and assets in the Middle East. Occidental also owns a specialty chemicals business. Belisle notes that Occidental is making progress toward reducing carbon emissions.

“I think these diversified companies will have to navigate some longer-term challenges, but they stand out to me early in 2021, based on my view of risk versus reward,” he says.

Fidelity® Select Natural Gas Portfolio held securities mentioned in this article as of its most recent holdings disclosure. For specific fund information, including holdings, please click on the fund trading symbol above.

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