We previously noted [4] the extreme spike in S&P Energy sector stock valuations (and the fact that energy sector earnings will have to surge by 70% in order for this exuberant to be 'discounted' correctly). Now Deutsche Bank has run the numbers and warns that in order for S&P Energy to now be trading at what we would consider a fair ~15x normalized EPS, $70/bbl oil must return and be sustained by 2H15.
Energy Valuation
Near and longer-term oil prices are very uncertain. Such uncertainties are best evaluated relative to what stocks price in.
[5]
We recognize that firms are quickly moving to lower their cost structure, but in order for S&P Energy to now be trading at what we would consider a fair ~15x normalized EPS (vs. 20+ 2015E EPS), $70/bbl oil must return and be sustained by 2H15.
[6]
Future oil prices and corresponding profits are debatable, but the sector’s PE on normal EPS is unlikely to exceed 15 given the recent reminder of the industry’s commoditized and highly competitive nature.
We expect $100-150bn of asset write-downs by Energy in 2015 (~$10 of S&P EPS).
[7]
Writedowns are excluded from non-GAAP EPS, and reduce future depreciation costs to help EPS, but such charges weigh on PEs as they signify the difficulty in earning strong returns through cycles.
Source: Deutsche Bank
