Credit Suisse Waiting for Oil Floor at $25 to Buy Energy Stocks

  • India, Japan, Europe stocks to benefit from oil price drop
  • Credit event in U.S. will clean up sector, Strobaek says

Credit Suisse Group AG is betting oil prices will bottom out around $25 and plans to boost its holdings of energy shares when it does, according to chief investment officer Michael Strobaek.

“Oil and the energy sector are getting outrageously cheap that it is worth taking big bets” Strobaek told investors in Zurich yesterday. “I’m hopeful and believe oil will hit $25 and then won’t go lower. It’s also a positive catalyst for a full flush-out of oil-related defaults.”

Energy companies in Brazil will be particularly attractive at that point, he told Bloomberg News. Strobaek sees equities of Europe, Japan and India as the biggest beneficiaries of the drop in crude. Some companies are starting to see this -- quarterly profit jumped at the Mumbai-based Reliance Industries Ltd. on higher margins for turning crude into fuels. In the euro-area, analysts project firms boosted their earnings by 10 percent in 2015.

It’s no secret that oil’s plunge to a 12-year low is battering energy companies: In the U.S. alone, 26 energy firms filed for bankruptcies in 2016, more than the five previous years combined. Norway, the biggest crude exporter in western Europe, declared a crisis in the sector, while Latin America’s Sete Brasil Participacoes SA hasn’t paid the world’s two biggest oil-rig builders since November 2014.

Still, as further losses trigger credit events among U.S. energy companies, that will clean up the “deeply distressed” industry and offer more buying opportunities in equities, Storbaek said.

While analysts have cut earnings estimates, oil stocks have fallen faster, leaving them cheaper than before in some regions. In Europe, they are trading at an almost one-year low relative to projected profit, while multiples for emerging-market peers are at a three-month low. Still, things may get worse before they get better.

“We’re probably going to hear in the next one to two quarters of an increasing number of companies stumbling over their own feet,” he said. “Their books are worse than what we know.”

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