Energy sector investors will need patience and a strong stomach

March 18, 2016 09:00 AM

When will the energy market rebound? You can answer that question by telling yourself a hopeful story: OPEC will tighten the spigots, perhaps, or a leaner, meaner shale market might reduce supply. Here at Eidosearch, we enjoy a good story as much as anyone, but we’re also data junkies, so we used our software to spot every moment in history when energy stocks tanked just as they have today. With history as our guide, we expect a rebound in the months ahead. But like any good story, our projection includes a rocky start and a surprise twist. “The future of energy,” shows you what to expect. 

You’ll need a strong stomach to invest in energy stocks over the next three months. After prices collapse on this scale, the market has historically suffered one last crumple. We charted average returns three months out, and they skewed negative in all six sectors of the oil and gas market. Drilling companies, in particular, experienced the steepest drops, averaging -6.0% returns. But notice a curiously resilient batch of companies on the right hand side of the chart. Midstream and integrated companies have historically experienced the mildest aftershocks, averaging -2.5% returns. It raises the question — will these stocks be the first to rebound? To answer that question, we projected the returns six months outward.

In fact, midstream companies have historically led the pack six months out, with an average return of 7.96%. They were followed by refining and marketing, integrated and E&P companies. Of course, the range of possible returns (the light gray bars) show that even these strong performers suffered moments of double-digit declines. It is still a decidedly risky market six months out. So where is the broad-based rebound?

Projecting one year out, and we see a solid double-digit recovery across the energy market. And here’s where the range of outcomes gets interesting. Drilling companies, which posed the most frightening investment three months out, not only averaged 40% returns in one year, but also had a range of returns that are almost exclusively on the upside. And what ever happened to our plucky midstream and refining and marketing companies? They’re also up, but with the biggest risk of a downside. 

It just goes to show that in any story of how a market might rebound, there are subtler twists and turns that no analyst could reasonably detect. But the patterns are there. They are echoes from the past that we can use for a sounder investment strategy.

About the Author

Dr. Steven Zhang is the CEO at EidoSearch.com, a  Ph.D. in electronic engineering and an internationally renowned expert in information processing technologies. His expertise is in the areas of signal processing, multimedia content analysis, computational intelligence, pattern classification, as well as, applications in bioinformatics and finance. 
@EidoSearch