Energy - Bounce or New Trend?

By Jim Farrish | August 21, 2008 | 10:17 AM | 0 Comments

Oil has started to rise leading to plenty of comments concerning supply/demand and the oversold state of the sector. iShare Energy Index (NYSE: IYE) has bounced 6.3% the last two days and the futures are pointing higher today. The chart shows a break of the short term downtrend line and momentum is pointing higher. So is this the proverbial bounce everyone has been looking for? More than likely the answer is yes. However, there may be more at work here than just a bounce. Companies like XTO Energy (NYSE: XTO) are rumored buyout candidates showing some M&A activity could be on tap. It would only make since if the price of such companies have fallen 40% or more in some cases. Taking into account the discoveries in natural gas the values seem cheap looking longer term than next quarter.

While oil is the driving factor in how many of these companies are viewed natural gas, pipelines, etc. are part of the valuations going forward. Fundamentally speaking there is value here for the buyer who is willing to hold longer term. The big question is will the major oil companies like Chevron (NYSE: CVX), Devon (NYSE: DVN), Conoco (NYSE: COP) and Exxon (NYSE: XOM) start acquiring these type companies? Seems like the logical thing would be to acquire on the cheap companies that have proven wells along with new finds without the risk of exploring and drilling. It could be time to dig into the sectors stocks and start looking for value like XTO Energy (NYSE: XTO) and Chesapeake Energy (NYSE: CHK). Something worth watching as this develops further.