Wall St Week Ahead: As energy shares tumble, opportunity lurks

Some see the big drop in energy shares as a buying opportunity

Shale stocks have been hard-hit as investors see margins all but evaporating following the slide in crude oil prices, but the US shale energy boom is not over.

An index of oil and gas exploration and production tumbled 8.15% on Friday as US crude fell almost 10% to around $66.36 per barrel to hit its lowest in 4-1/2 years.

The slide came the day after oil cartel OPEC decided not to cut output in a meeting in Vienna. Prior to the decision, Saudi officials were reported as saying the kingdom, with its large currency reserves, was prepared to withstand oil prices as low as $70-$80 per barrel for up to a year.

But the weaker shale players may not have that long.

"We do not know if OPEC has ulterior motives to let oil prices drift lower and pinch the global (exploration and production) sector, or if reaching a consensus on cuts was just too challenging," wrote Wells Fargo Securities in a Friday client note. "What is clear is that lower cash flows are highly likely to translate into lower E&P spending."

US crude prices were catching up to Thursday's action in Brent as markets across the United States were closed for the Thanksgiving holiday. Friday's was a half-day session.

"We'll wait to see the trend next week when there's full market volume, however it's clear that as oil prices come down there will be pressure for the weaker of the companies in the sector, particularly exploration and the ones that are highly indebted," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

The overall energy sector of the S&P 500 fell 6.3% on Friday, adding to its year-to-date losses, now at 10.3%.

Fourteen of the sector's more than 40 stocks are within 2% of a 52-week low and the sector's weighting on the S&P 500 has dropped to single digits, closing below 8% after Friday's shellacking, according to Reuters data.

Nearly 90% of the sector's shares are trading below their 100-day moving average.

However, the sharp declines also create an opportunity.

"We recently moved from an underweight to a neutral weight rating in energy, so directionally we agree with the idea that this weakness is a buying opportunity, but it is very hard to tell where the bottom is," said Tony Roth, chief investment officer at Wilmington Trust in Wilmington, Delaware.

"Crude seems to have no floor right now, and we could easily see the price drop into the low $60s."

With the big stock price drops, others see a run to consolidation. The sector subindex is down 12% in 2014, with year-to-date losses of more than 20% in seven companies.

"I think we'll see some healthy consolidation take place," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.

"Some may wither on the vine, but technology has improved to make it profitable to extract at a lower price point than last year. As a result, we'll probably see some opportunistic buying."

Jacobsen and Krosby said the slide in oil prices and the sector's shares does not mean the boom in the energy sector in the United States is ending, but will likely enter a new stage of development.

"The renaissance isn't over," said Jacobsen. "It's just maturing."