Oil and gas stocks may be headed for a multi-year bull run, which fund managers will miss if they continue to dump oil and gas stocks in the growing drive to account for environmental, social and governance (ESG) factors in their investments, HFI Research said in an article in Seeking Alpha.

The growing number of funds ditching oil stocks could be viewed as a contrarian signal for the energy stock market, which has performed very poorly in recent years and has alienated environment-conscious investors, according to HFI Research.

The research service thinks that oil prices will not stay at the $40 a barrel mark for a very long time, because the ongoing bankruptcies and unavailability of new capital for drilling in the U.S. shale patch will eventually lead to a drop in production. At the current prices, bankruptcies will proceed in the U.S. shale industry, which has seen the biggest production growth in recent years. After this crisis is over, a lot of supply out of the U.S. will have been destroyed, leading to higher prices, HFI Research reckons.

“We believe those fund managers that are selling today because of climate change or just bad performance will be missing out on a multi-year bull market in energy stocks and energy prices,” HFI Research says.

Meanwhile, the lower-for-longer oil prices and the high debt levels of many U.S. oil companies resulted in as many as 16 filings for bankruptcy protection in the shale patch in July alone, bringing the total since the price crash to 50, the latest bankruptcy monitoring data from law firm Haynes and Boone showed.

“Of note, this latest downturn not only affects smaller recently hatched shale producers, but July saw two of the largest filings involve well established oil companies,” such as California Resources and Denbury Resources, Haynes and Boone said.

“It is reasonable to expect that a substantial number of producers will continue to seek protection from creditors in bankruptcy even if oil prices recover over the next few months,” the law firm noted.

Oil at $40 is not enough for indebted U.S. shale drillers, Rystad Energy said in research earlier this week.

By Tsvetana Paraskova for Oilprice.com

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