4.Valuations still reflect pessimism. It’s difficult to assess value in the energy space because no one knows where oil and gas prices are going. But if we make the assumption that prices will be stable or higher in the months ahead—a reasonable assumption we think—then energy sector valuations look quite compelling. Forward estimates imply a price-to-earnings ratio below 9, as shown in the chart below, compared to the S&P 500 at 17.5. Cash flow valuations look just as compelling, with free cash flow yields over 10%, more than double S&P 500 levels (free cash flow yield is how much cash is generated after capital expenditures relative to share price). On a price-to-book value basis, the sector’s valuation is not as compelling at 2.4 times, but that is roughly in line with the long-term average and hardly expensive.