Which leads us to a redo of the simple calculation we did one year ago: what does the current disconnect between the price of oil, energy stock prices and valuations mean? The answer, like last January, is simple: either the long-term PE multiple is now null and void, and the “New Normal” forward PE of not only 20x+, but almost 60x, is “realistic”, which of course is ridiculous, or there are two alternatives:
- Energy sector earnings have to surge by 275%, implying oil prices have to more than triple to $148, for the forward P/E multiple to return to normal, or
- The Energy sector price has to crash from 461 today to 123 where it would trade down to its historic forward 14x P/E multiple, suggesting a price drop of over 70%!
This is shown visually on the table below:
We’ll let the algos decide which option works.
This article is brought to you courtesy of Tyler Durden From Zero Hedge.