Energy Sector

The S&P energy sector ($SPEN) has outperformed the market since late summer '10 primarily
on the strength of a run up in the oil price which started a little earlier last year but kept on
rallying through the seasonally weak Oct. - Dec. time slot.

The $SPEN had peak earnings of $51 per share in 2008. Earnings tanked to $17 in 2009 on weaker
volumes and price busts in petroleum and gas, but rebounded to $35 in 2010 on recovering volume
and higher petroleum and oil related price realizations. Analysts look for a further rebound in net
to about $42 this year on higher oil volumes and prices. The sector is selling for a reasonable
multiple of 13.7x 2011 eps. The northern hemisphere gasoline build will wind up before long,
and the oil price will be due for another seasonal dip.

Sector earnings for the first and second quarters should be fine on a yr/yr basis, but given the
importance of the oil price trend to the relative strength in performance to the sector, players
will have to look past any seasonal weakness in the oil price to the third quarter for the sector
to maintain its relative strength. This is hardly a done deal given the recent fast dip in the $SPEN
composite when the oil price weakened briefly in the wake of the monster quake in Japan.

$SPEN chart / sector relative strength.

Since the sector has been primarily a price momentum play, oil sector players need to keep
this well in mind in addition to value considerations they may apply.

The other factor at play here is that of the 10 major market sectors, only the energy group and
the heavy duty industrials show marked relative price strength so far this year. Thus, the oil and
oil service stocks, while favorites, may have elevated price risk should a less favorable
turn come for the oil price.