As Oil Tumbles, Just How (Massively) Overpriced Are Energy Companies? Here Is One Answer…” energy companies appear to be overpriced about 100% relative to fundamentals.”

Monday, August 1, 2016
By Paul Martin

by Tyler Durden
Aug 1, 2016

Back in March, when oil was aggressively rising from its February lows and the market was happily extrapolating a rebound to more traditional levels, around $60-70bbl on hopes of a supply reduction from OPEC, we showed a dramatic chart of the energy sector’s forward PE, which had risen to never before seen levels.

Since then oil has plateaued and has resumed its descent, recently sliding in a new bear market, and as of this moment flirting with $40/bbl as the realization of an unprecedented gasoline glut, together with ongoing excess supply and weaker than expected demand, pushed back the supposed “equilibrium” date from late 2016 to sometime in 2017 if not later.

But while oil has seen a steep pullback, this has not yet impacted junk bonds which have been surprisingly resilient on the back of the ECB’s launch of the CSPP program in June at which point the oil-HY correlation broke down, nor has it truly hit energy stocks.

That may change soon: as BofA’s Michael Hartnett writes, “traders should wait to see if oil can hold $40/bbl before adding risk here. Should oil slice through $40/bbl, attention will quickly switch to weak oil, weak Chinese renminbi and weak credit in a repeat of last summer. EM debt could also be pressured given the massive recent inflows into the asset class. Note that energy stocks have jumped far higher than EPS expectations would justify.”

How much higher? One answer is shown in the following chart from BofA, perhaps inspired by the fwd PE valuation chart we showed 5 months ago. A rough indication suggests that unless oil manages to credibly rebound and sustain its bounce, energy companies appear to be overpriced about 100% relative to fundamentals.

The Rest…HERE

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