Oil & Gas Companies The Victim Of Oil’s Failed Recovery (XOP)

From Tsvetana Paraskova: The oil price recovery that analysts and investors were expecting early this year have failed to materialize, battering the energy sector stocks in 2017. Shares of energy companies are set to book their steepest monthly drop in August since the end of 2015, when the oil price crash was in full swing.

U.S. energy companies reported at the end of July and early August generally better earnings compared to last year’s low comparison base, but this was not enough to convince investors to start seeing the stocks as attractive.

Some companies trimmed capital budget plans as an answer to the persistently low oil prices and as reassurance to investors that they would embrace financial discipline. Others reported higher-than-expected production and raised output guidance for this year. However, this signaled to investors that rising supply from the U.S. would continue to depress global oil prices, and further drag energy shares down.

So far in August–with data in as of August 29–the energy sector in the S&P 500 was down 17.2 percent year to date, Yardeni Research said, based on its analysis of the S&P 500 sectors & industries performance. To compare, the S&P 500 Index has gained 9.3 percent year to date. Energy has been the worst-performing sector this year, and is one of two sectors–out of 11–that has booked a negative performance, the other being telecom services. In August alone, the S&P 500 Index was down 1.0 percent through August 29, and most of the other sectors, except for information technology and utilities, are also down. But the energy sector dropped the most, by 6.2 percent so far this month.

Last year, the energy sector was the biggest winner of the S&P, rising 23.65 percent, and followed by financials and telecom. But in 2016, oil prices recovered from the below-US$30-lows in February, with WTI closing last year at US$53.72, up by 45 percent since January, for its best performance since 2009. At the end of 2016, oil prices rallied on expectations, and later the confirmation, that OPEC would start cutting production this year to prop up prices and draw down the global glut.

Early into this year, analysts and investors were way more optimistic about the oil price recovery, but as global inventories continued to stay high and OPEC lost its market charm with the cuts and compliance, prices started dropping again, and WTI has traded mostly below US$50–and frequently below US$45–since early March.

This failed recovery slammed energy stocks.

According to data by Morningstar, cited by The Wall Street Journal, energy-focused stock funds have seen around US$2.7 billion of outflows between January and July, compared to some US$5.8 billion inflows in 2016.

According to analysts briefed by the Journal, Q2 results reports contributed to the energy sector’s poor performance this month. Some, like Pioneer Natural Resources, had an especially bad month after encountering problems with wells in the Permian. Others boosted production guidance, contributing to investors’ concern that rising U.S. output will continue to put downward pressure on oil prices.

“We did fall behind operationally on our completions in the Spraberry/Wolfcamp in large part due to unforeseen drilling delays…we now find we have a higher percentage of what we kind of refer to as train wreck wells, where we have all kinds of problems,” Pioneer Natural Resources’ President and CEO Timothy Dove said at the Q2 results conference call.

Pioneer’s stock has lost 21.54 percent in August, with year-to-date performance down by 29 percent.

Chesapeake Energy Corp beat Q2 estimates in terms of financials, but production fell short of expectations. The stock is down 26.61 percent this month, and down 48 percent year to date.

“These companies attracted fund flows because of production growth. Now they’re in this Catch-22 situation where investors also don’t want companies increasing supply dramatically,” David Deckelbaum, an energy analyst with KeyBanc Capital Markets, told the Journal.

Some analysts consider the international oil majors to still be attractive, while others believe that energy stocks may not be worth buying because in the lower-for-longer oil prices, growth may be underwhelming.

“Overall, our team does not think energy equities look cheap at all,” John Vail, chief global strategist at Nikko Asset Management, told the Journal.

The SPDR S&P Oil & Gas Explore & Prod. ETF (NYSE:XOP) was unchanged in premarket trading Thursday. Year-to-date, XOP has declined -28.17%, versus a 11.07% rise in the benchmark S&P 500 index during the same period.

XOP currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #26 of 37 ETFs in the Energy Equities ETFs category.


This article is brought to you courtesy of OilPrice.com.

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