Oil Shares at Deepest Discount Signal Recession's End


"Energy will be one of the industries that lead us out."

The cheapest valuations in at least 14 years are making oil companies too alluring to pass up for UBS AG and Guggenheim Partners LLC, even though earnings in the industry may fall 48% this year.

Oil and gas producers in the MSCI World Index traded at $7.84 per dollar of profit this month, less than half the average of $17.10 in the gauge of developed markets and the widest gap since at least 1995, data compiled by Bloomberg show. UBS, Guggenheim and Cohen & Steers Inc. are buying stocks from Exxon Mobil Corp. to Transocean Ltd. because an economic rebound will lift the industry after it generated at least 50% more profits than any other group in the past year.

Recovering energy shares may signal an end to the 42% drop in the MSCI World since October 2007 and the first global contraction in six decades. Rallies in oil and gas stocks marked the end of the last five U.S. recessions based on average returns, according to Ned Davis Research Inc.

"Energy will be one of the industries that lead us out," said Scott Minerd, who oversees more than $100 billion as chief investment officer at Guggenheim in Santa Monica, California. "Shares are cheap and attractive. It's a very good time for investors to buy the group betting on stronger demand for commodities and a rebound in earnings."

'Rear-View Mirror'

The Paris-based International Energy Agency estimates that the global recession will slash worldwide oil demand by 2.8 percent this year. Lower profits have prompted the Hague-based Shell, the largest oil company in Europe by market value, to put two refineries in northern Germany up for sale, and it may close or sell another plant in Montreal.

Without increased demand, energy shares won't beat the stock market's performance, said E. William Stone, who oversees $96 billion as chief investment strategist at PNC Financial Services Group Inc.'s wealth management unit in Philadelphia.

"Energy shares are not necessarily cheap, especially looking at the past 12 months of earnings," said Stone. "You're looking at the rear-view mirror at much higher oil prices. That may mislead you."

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