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Quarter-End Insights

Our Outlook for Energy Stocks

Large-cap energy stocks offer the most attractive valuations heading into 2011.

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  • Record global demand, falling inventories, and a shrinking supply cushion bodes well for oil prices entering 2011. Natural gas fundamentals should improve throughout 2011, as the gas-directed rig count shrinks.
  •  Chevron (CVX) enters the Pennsylvania Marcellus Shale via its acquisition of Atlas Energy (ATLS), adding to earlier major integrated firm activity in the region from  Royal Dutch Shell (RDS.A) and  ExxonMobil (XOM). We expect this is just the tip of the iceberg.
  • Valuations in the energy sector appear slightly overvalued as a group, following the large rally this quarter. Large-cap stocks appear slightly undervalued, where mid- and small-cap stocks appear overvalued heading into 2011.

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Eric Chenoweth has a position in the following securities mentioned above: CVX, XOM, RRC, RDS.A. Find out about Morningstar’s editorial policies.