Beware Big Oil stocks

NEW YORK (CNNMoney.com) -- With crude prices jumping to record highs, yet the stock of big oil firms rising only modestly, it may be tempting to put money into the energy sector.

Some analysts say that would be a bad bet.

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"Nobody in his right mind thinks this oil price is sustainable or justified by market fundamentals," said Fadel Gheit, a senior energy analyst at Oppenheimer. "The higher prices go, the greater the risk for downside potential."

Over the last month the price of U.S. crude on the New York Mercantile Exchange has surged nearly 20 percent, hitting a record high of $83.90 a barrel last week.

Yet the AMEX oil and gas index, which tracks both large and small U.S. oil companies as well as refiners and oil service firms, has risen just over 6 percent over the same time.

The big integrated oil companies haven't done much better. Exxon Mobil (Charts, Fortune 500) and ConocoPhillips (Charts, Fortune 500) are up about 8 percent, while Chevron (Charts, Fortune 500) has risen just over 6 percent.

Gheit said investors are betting oil prices won't stay at their current record levels.

His view is by no means unanimous across the industry. Many experts say a limited supply coupled with seemingly infinite new demand does justify oil prices above $80.

"With China and India growing the way they are, they're just not going to go down," said Harry Clark, whose firm Clark Capital Management has a buy rating on the whole energy sector. "$100 oil, it's only a matter of when, not if."

But Gheit seemed to think the sector may be played out. He pointed to the impressive growth the sector has seen over the last five years - crude prices along with shares of Exxon, Conoco and Chevron have roughly tripled during that time.

"A lot of people say energy has already exceeded the wildest expectations," he said. "If oil prices come down, you're going to see total migration out of the sector" and into things like technology, which has lagged the broader market for the last several years.

How far energy prices might come down, if they come down at all, is anyone's guess.

Oil company stock is currently valued as if crude cost $60 a barrel, according to Mark Gilman, a New York-based oil and gas analyst with the brokerage The Benchmark Co.

But given what it costs to produce a barrel of crude and the amount of oil left in the ground, Gilman thinks even $60 is too high.

"You take out all the fluff and the fear and the speculation, and $35 to $40 is where the price of crude ultimately belongs," he said.

When asked if that could mean a halving of Big Oil share prices, he said that sounded about right.

But even if crude falls to $60 a barrel, it's still far higher than the industry has historically been making. With capital projects planned around a crude price of $30 to $40 a barrel, the oil firms might be flush with cash for years to come, returning that money to shareholders in the form of dividend increases and share buybacks. Wouldn't that alone bid up the stock price?

Gheit said no.

"Investors reward the rate of change, not the level of profit," he said. "No one thinks oil prices can triple again in the next five years."