By Lewis Krauskopf
NEW YORK, Aug 25 (Reuters) - There may be little relief onthe horizon for investors in U.S. energy companies, whose sharesmoved from darlings to dismal performers during Wall Street'srecord bull run and now face a shaky global economy, doubtsabout fossil fuel investments and general market skepticism.
Energy has been the worst performing of the 11 S&P500 sectors this year, the worst performer since U.S. PresidentDonald Trump's 2016 election and the worst performer since theU.S. bull stock market began more than a decade ago.
As a result, the S&P 500 energy sector has its lowest weightin the overall S&P 500 since at least 1995, according toRefinitiv Datastream data. It represents under 5% of thebenchmark index, down from over 15% in mid 2008, when oil pricesreached historic highs at over $140 a barrel, nearly three timescurrent levels.
But this year, the energy sector has even failed to keeppace with oil prices, despite their traditional tendency to movein the same direction.
The poor returns raised some hope that the sector will soonfind a floor that would allow it to rebound, especially thosestocks with appealing dividends, but that remains to be seen.
“The view of the sector in general has gotten to a pointwhere it's a very difficult space for institutional investors toembrace because it's been such a chronic underperformer,” saidWalter Todd, chief investment officer at Greenwood Capital inSouth Carolina.
Since the current bull run began on March 2009, the S&P 500,which many investors view as a proxy for the stock market, hassoared well over 300%, while the energy sector has climbed 32%.
Oil prices are up relatively little over the course of thebull market, which has largely overlapped with a U.S. economicexpansion characterized by modest growth and with a boom inshale exploration that helped make the country the world's topoil producer.
This year, however, U.S. crude prices have climbedover 18% to about $54 a barrel against a 3% drop for the energysector, although there is a wide disparity in performance amongthe 28 S&P 500 energy stocks.
“If you look over the last 18 to 24 months, the reason whythis space is so frustrating is because when oil rallies, theyrally but not nearly to the degree you think that they should,"Todd said. "But then when oil comes in, they get crushed.”
Investors have become wary of energy companies in the pastout-spending their cash flows and of drilling wells withoutadequate returns, said Pearce Hammond, managing director atSimmons Energy in Houston.
"Basically, they were destroying capital," Hammond said. "Itseems like this year has been the year when investors said:'Stop.' "
Trump has sought to cut regulations involving energy andother natural resources companies, but the sector has stillstruggled during his administration.
“If you remove regulation, you are inviting more drillingwhich then adds supply which means lower prices," said ChristianLedoux, chief investment officer at South Texas Money Managementin San Antonio.
Trump's tariff battle against China is raising concernsabout the economy. Indeed, falling long-dated yields in the U.S.Treasury market have inverted the yield curve, a warning signthat a recession could be looming. This could particularly hitenergy stocks.
“It’s an economically sensitive space and they are probablyone of the largest victims of any trade war concerns,” saidBurns McKinney, portfolio manager with Allianz Global Investorsin Dallas.
Energy shares underperformed on Friday as trade tensionsescalated and China threatened to impose tariffs on U.S. crudeoil imports for the first time.
Some investors avoid the fossil fuel industry as they worryabout the companies' impact on climate change.
"The oil and gas companies, for a lot of investors, havebecome a bit of a pariah," Hammond said.
To be sure, the energy stocks have lagged so much that somestrategists and investors say they are becoming appealing.
Citigroup equity strategist Tobias Levkovich rates thesector "overweight," noting it is at its most attractivevaluation relative to the S&P 500 since 2002. But in a recentreport, Levkovich conceded: "We along with others struggle toperceive which catalysts encourage the Street to step back in tothe sector, short of a major supply disruption."
Some investors say energy shares could benefit simply from acatch-up trade with oil.
Another factor: High dividend payout rates among somecompanies as U.S. Treasury yields have tumbled. Exxon MobilCorp's dividend yields 5%, while Occidental PetroleumCorp yields 7%, compared to just a 1.54% yield on the10-year U.S. Treasury note.
“If you stick to investment-grade rated companies, there’s apretty small list of energy companies to invest in, and if youdid that you’d probably be OK,” said Ledoux, whose firm'sholdings include Chevron Corp.
However, Robert Pavlik, chief investment strategist atSlateStone Wealth, who is slightly underweight the sector, saidhe could sell energy holdings should the stocks rise to lock inprofits.
"I don’t think that there is that much upside," Pavlik said."Where is oil going to go if the whole industry continues toshift (to alternative energy) as it is and we are looking at aslowdown in the economy?"
(Reporting by Lewis Krauskopf; Editing by Alden Bentley andDavid Gregorio)