2015 was brutal for energy stocks, and one industry guru thinks 2016 might be even worse

Energy stocks had a monumentally bad year in 2015. The iShares Global energy ETF, which does a decent job at tracking the industry as a whole, was down over 20%.

Oil prices tumbled, earnings dried up, and there were massive layoffs.

It can only go up from here, right?

Wrong, argue Oppenheimer analysts Fadel Gheit and Luis Amadeo.

“We think 2016 could be even worse than 2015 for energy stocks on declining oil and gas prices and deteriorating financial condition,” wrote Gheit and Amadeo in a note.

The bull thesis is that oil prices will recover as the glut of supply subsides, helping to lift earnings and stock prices. In the analysts opinion, this is far too optimistic.

“[Acceptable returns] can only be achieved if prices exceed $75/b this year or more than double their current levels, which, barring a major supply disruption, is highly unlikely, in our view,” said the note.

Prices have been trading at around $35/b recently.

“Using strip prices, we expect nine of the 15 large E&P companies we cover to have losses in 2015 and all 15 companies to have losses in 2016. The consensus estimates indicate that seven of the 15 companies will report losses in 2015 and eight in 2016.”

Another story of hope is the idea companies can curtail the losses by reducing large spending on new machinery, as evidenced by the declining Baker Hughes rig count, which helps the bottom line and, again, decreases supply.

“Despite CAPEX and expense reductions, efficiency gains and well performance improvements, the deficit was funded with proceeds from asset sales and additional borrowing,” said Gheit and Amadeo. “Companies are self-liquidating by living beyond their means with dire consequences.”

One hope, said the analysts, is that companies can come to their senses and begin to consolidate the industry.

Currently, there is a “wide expectation gap” between smaller, struggling companies that could be targets and those that are willing buyers. Gheit and Amadeo believe sellers will eventually see the light and realise oil prices will be lower for longer, finally capitulating to sale.

The start of a new year can be a time for hope and renewal, but if Gheit and Amadeo’s predictions hold true for energy companies, it’s just the continuation of a dismal slog

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