Reuters Investment Summit

Energy shares rank among top picks in '09

NEW YORK (Reuters) - Energy shares are hot again.

After plummeting about 40 percent in the second half of this year, they are looking attractively priced to some of biggest investors as they position themselves for 2009.

While the precipitous drop in crude oil and natural gas prices from their record highs in July have pounded the sector, money managers are betting oil will inevitably rebound. That's because as demand is falling amid a global slump, production cuts mean supply is falling faster.

Once the economy begins to stabilize, demand will return with a vengeance, they said.

"We very rarely invest in energy ... but I think there are some great opportunities," Whitney Tilson, founder of hedge fund T2 Partners told the Reuters Investment Outlook Summit in New York this week.

Bob Doll, global chief investment officer of equities at BlackRock (BLK.N: Quote, Profile, Research, Stock Buzz) and Margaret Patel, senior portfolio manager at Evergreen Investments, also see energy as among the most compelling sectors, while renowned hedge-fund manager Jim Rogers said the credit crisis had not killed the bull market in commodities, including oil, but only dealt it a "horrible setback."

An S&P index of energy companies .GSPE is currently down 41 percent in the second half, during which the benchmark S&P 500 .SPX index fell 34 percent. An index of oil services companies is currently down 67 percent from its record high of $364.26 hit on July 2.

"We are in a nasty global recession and oil demand will be affected by that, no question about it," Doll of BlackRock said. "But we are still not drilling enough holes to get enough out of the ground to replace that which we are even using at these lower levels. So oil prices, as the economy recovers, have to come back."

As the global economic slump has crushed demand for energy, some U.S. refiners, facing dismal profit margins, have scaled back production, with more cuts likely. This week, the OPEC president called for more "severe" production cuts.

Doll recommended selling retailers that have rallied in recent weeks and buying energy companies instead.

"Some of the big integrated oils, we think, represent reasonable value," he said, adding he would stay in the defensive names such as Chevron (CVX.N: Quote, Profile, Research, Stock Buzz) and Exxon (XOM.N: Quote, Profile, Research, Stock Buzz) for now. Doll said buying ConocoPhillips (COP.N: Quote, Profile, Research, Stock Buzz), Occidental Petroleum (OXY.N: Quote, Profile, Research, Stock Buzz) and some of the bigger, more conservative exploration and production companies like Apache Corp (APA.N: Quote, Profile, Research, Stock Buzz) would also "make sense."

For her part, Evergreen's Patel said energy services companies would do well, "as it gets more and more technically difficult to bring gas and oil out of the ground."

T2 Partners' Tilson, a value investor, said the energy sector had attracted "a lot of momentum-oriented investors, investors on leverage, and you are seeing all of that unwind like crazy." Tilson owns natural gas company Crosstex Energy (XTXI.O: Quote, Profile, Research, Stock Buzz) and oil and natural gas company Contango Oil & Gas (MCF.A: Quote, Profile, Research, Stock Buzz).

Renowned commodities investor Jim Rogers is also betting that dwindling reserves of oil will drive a recovery in energy, but he said he's investing directly in the commodity. He told the Reuters Summit that he bought oil last week as crude prices collapsed to near four-year lows.

Jim O'Shaughnessy, chief investment officer at O'Shaughnessy Asset Management, owns Exxon Mobil, which he said has attractive valuation.

Like other money managers, he's focusing on sectors expected to farewell even in a recession.

O'Shaughnessy said he owns a number of consumer companies catering to people who are pinching their pennies, such as discount retailers Wal-Mart (WMT.N: Quote, Profile, Research, Stock Buzz) and Dollar Tree (DLTR.O: Quote, Profile, Research, Stock Buzz) and satellite TV provider DirecTV (DTV.O: Quote, Profile, Research, Stock Buzz).

"Do we see a theme here? People are going to sit at home, watch DirecTV, go to Costco, buy their cheap beer there, and try to weather out the recession," O'Shaughnessy said.