It is not a question of if—but rather by how much—energy stocks are under-owned. Portfolio managers typically run diversified funds with a market (or neutral) weighting in energy, recently around 11% for the Standard & Poor's 500 Index. Of late, though, energy has comprised less than the benchmark, resulting in “underweight” energy positions.

But why bother having even a market weighting if your sense is that energy will be a laggard relative to the broader market? Certainly, that instinct can only have been reinforced by the sector's recent failure to keep pace with the market average. And what's the impetus to hold energy, anyway, if pundits are saying that energy prices are likely to be range-bound and trade mostly sideways?

Historically, the energy sector in general has not been immune to charges of destroying capital. In part, this reflects a tendency in a cyclical industry to invest in major projects near the top of the cycle and see those projects come to fruition months or years later, when commodity prices may be closer to cycle lows than highs.

But is it possible that the albatross around energy's neck has begun to weigh a little less? Could the sector's opportunity set allow it to redeem itself, in part, from charges of bad behavior?

A heightened sense of discipline came with the first-quarter earnings commentary, in which adding gas-directed rigs was barely discussed—even for the prolific Marcellus shale—as natural gas prices jumped briefly above $4 per thousand cubic feet (Mcf). And with the drift lower in oil prices earlier this year, greater scrutiny has been given to the tipping point needed in oil and gas pricing to favor investment in one sector over the other.

This returns mindset is reflected in a recent Barclays study aimed at ascertaining the price level at which gas projects, by basin, can compete for capital against oil projects.

Assumptions include a West Texas Intermediate price of $93 per barrel, a natural gas price of $4.15 per Mcf, and that the oil well at risk of being displaced by a competing natural gas well is a Bakken well that is the marginal, rather than average, producer in its basin.

One area of research by Barclays examined the ratio of a well's present value of future cash flows versus its upfront cash investment, or PV-to-I ratio.

Its finding was that wells in the wet Marcellus, the dry Marcellus, the Fayetteville and wet Barnett all scored a PV-to-I of 1.3 or higher—an industry rule of thumb for considering a well worth drilling. The marginal Bakken well scored above 1.6, slightly ahead of a dry Marcellus well, while a wet Marcellus well had a PV-to-I of more than 1.8.

But underscoring the economics of the Marcellus was the finding that wet-gas and dry Marcellus wells needed prices of only $2.63 and $3.69, respectively, to meet the PV-to-I threshold of 1.3.

This compared to $3.98 and $4.24 for the Fayetteville and wet Barnett, while a Haynesville well required $4.86 to meet the 1.3 PV-to-I threshold and as much as $5.97 if it were to be competitive with the higher PV-to-I attained by the marginal Bakken producer.

The prolific economics of the Marcellus have helped support a growing viewpoint that—even with the Nymex 2014 strip still around $4 per Mcf—companies operating in the basin will be able to throw off so much cash flow as they move into manufacturing mode that the E&P sector's thorny issue of a “funding gap” may begin to close. This issue, where E&Ps struggle to finance their growth internally, has long impeded certain investors looking at energy.

Indeed, some long-time industry observers suggest that companies' rising free cash flow generation (a surplus of cash flow relative to capex), coupled with the visibility of a decade or more of inventory to drill, will over time be rewarded with rising valuation multiples, as energy is compared favorably versus other industry sectors. (See cover story in this issue.) This likely has already contributed to above-average multiples for Range Resources and Cabot Oil & Gas, among others.

Could more valuation uplift be on the way? Is money still on the sidelines to win over? Says one Boston buysider: “There's a whole cohort of portfolio managers that look at free cash flow generation and returns, and they're underweight energy now.” So if energy delivers, money is poised to move to the sector, too.

For more on capital access, see OilandGasInvestor.com.