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Fund managers, convinced oil bottom is here, buy up energy stocks

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After several false starts over the last two years, US fund managers are betting that energy stocks have finally hit bottom.

[NEW YORK] After several false starts over the last two years, US fund managers are betting that energy stocks have finally hit bottom.

Firms including T Rowe Price, Fidelity, and American Funds have been adding shares of exploration and production companies that they say have the most to gain from oil prices stabilizing. The price of oil fell from US$115 a barrel to US$27.88 between June 2014 and January of this year, yet is up more than 50 per cent since hitting its low.

The number of funds buying shares of ConocoPhillips jumped 144 per cent over the last three months compared with the previous quarter, according to data from fund tracker Morningstar. Occidental Petroleum Corp, meanwhile, had a 110 per cent increase in new owners.

"The E&P companies have taken the brunt of the pain that I think they will see in their business, so they will go into recovery faster and first," said Bill Costello, a portfolio manager at Westwood who has been adding to his exposure of the sector.

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Some companies in the sector, such as Marathon Oil Corp and Devon Energy Corp have plugged holes in their balance sheets by selling assets and offering additional equity shares to investors, he said, allowing them to withstand a prolonged era of relatively low oil prices.

The rush of fund managers to buy exploration and production companies after several quarters of shedding them is one reason why the sector is up 9 per cent for the year to date, outpacing both the 6.3 per cent gain for energy stocks as a whole and the 1.8 per cent gain in the broad Standard & Poor's 500.

Overall, energy stocks remain the most underweight sector among fund mangers, with the average large cap fund holding approximately 1 per cent less of its portfolio in the sector than its weight in the benchmark index, according to Lipper data.

Fund managers say that they are buying exploration and production companies in part because they expect the oil glut to dwindle this year as production halts begin to take effect, setting up for a rally in revenue and earnings in 2017.

"If you stop being negative on energy, you don't want to buy a safe energy play, you want to buy a levered play," said Ernesto Ramos, a portfolio manager at BMO Asset Management Company, referring to EOG Resources, whose revenues are closely tied to oil prices. Shares of the company are up 6.7 per cent for the year to date, roughly half of the 14.6 per cent increase in oil over the same time.

Overall, earnings among energy companies in the S&P 500 are expected to fall 66.5 per cent in 2016, before gaining 203.1 per cent in 2017, according to Thomson Reuters data.

The prospects of a revenue and earnings rebound over the next two years is attracting growth-focused fund managers who have typically shied away from the energy sector.

Mike Pytosh, portfolio manager of the Voya MidCap Opportunities fund, said that he shifted his energy exposure during the January and February sell-off from refineries to exploration and production companies that were the hardest hit.

"It certainly got to a point where it was oversold. You have to not look at where the expectations are now, but where these companies will be a year or two out," he said.