Everyone's bargain list just got a LOT longer. Energy stocks can finally stop feeling so lonely. They have plenty of company now.
If you've (hopefully) followed Adam Hewison's posts, he illustrated on Monday that it's not yet safe to start acting on your bargain list, as far as stocks are concerned. The broad-market long-term trade triangles are (obviously) flashing red right now, and Fibonacci indicators don't show support for this falling knife until much lower levels.
Adam specifically touched on crude oil in his Tuesday post, saying its RSI is very oversold and flat, and combined with a falling market, one would expect a bottoming out at some point. "Not to say it can't go lower," he added.
So even though your bargain list might be just that – a "watch list" – let's begin looking at whether to even consider energy.
A brief look back
Remember $108 oil, back in the summer of 2014? WTI crude has already traded as low as $38.00 this week, and looks as though it's unlikely to return even to the $60s – in a sustained way – for perhaps many years. In fact, a dip into the $20s seems at least equally likely at this point, given the supply glut combined with the newfound volatility and fear across all markets.
So oil has shed about 65% so far, and has generally held below $60 for all but 14 days since falling below that level 9 months ago. And, of course, oil's plunge has taken the value of most oil companies with it. Feast your eyes:
Offshore oil & gas drilling companies like Transocean (RIG), Seadrill (SDRL), Noble (NE), and Diamond Offshore Drilling (DO) have lost 58 – 85% of their market value since June 20, 2014, with DO and NE doing a little "less terrible" than RIG and especially SDRL.
Equipment & services providers Schlumberger (SLB) and Baker Hughes (BHI) have each fallen more than 32%, while National Oilwell Varco (NOV) and Weatherford (WFT) have waved goodbye to 53% and 66% of their market caps, respectively.
Shale oil producers like EOG Resources (EOG), Apache (APA), Anadarko (APC), Chesapeake (CHK), Bonanza Creek (BCEI), and Nabors (NBR) have seen their value slashed by 40 – 90%, with EOG and APC on the "high end," and with BCEI and CHK bringing up – or down – the rear.
One might reasonably expect pipeline companies and MLPs like Enbridge (ENB), Kinder Morgan (KMI), and TransCanada (TRP) to be somewhat insulated from oil price movements, since pipeline owners get to charge oil companies for the use of the pipeline based on volume transported, not based on the value of the oil or gas. Yet these companies are generally down 15 – 30%. Plains All-American is trading 45% below its June 20, 2014, price. Most – if not all – the declines for the companies in this sub-sector have occurred in the last 3 months or so.
Oil refiners benefit from low oil prices since oil is their key raw material. Tesoro (TSO) is up (that's right, up) 46% since oil's peak price last year (despite giving up almost 17% in the last 2 weeks). Other refiners like Valero (VLO), HollyFrontier (HFC), Phillips 66 (PSX), and Western Refining (WNR) range anywhere from down 16% to up 2% since June 2014. The last 2 weeks have been especially unkind to this group, with losses ranging from 14 – 18%.
Finally, even the huge, integrated oil and gas companies like Exxon Mobil (XOM), Chevron (CVX), British Petroleum (BP), Occidental Petroleum (OXY), Royal Dutch Shell (RDS), and ConocoPhillips (COP) have lost between 34 and 50% of their value since last summer. CVX and COP have been crushed the most.
Is Exxon Really Worth 33.8% Less Than It Was Worth 1 Year Ago?
Exxon is the industry behemoth. It's the world's largest oil company, sporting a $300 billion market capitalization. The company is an "integrated oil major," meaning it participates globally in all aspects of the oil business, including refining, exploring, drilling, marketing, distributing. I'’s widely followed and invested in, pays a 4.0% dividend that I would categorize as secure, and has the wherewithal (to say the least) to not only weather the storm but also likely grow by making opportunistic acquisitions. And of course, the company enjoys world-class leadership from its executive team.
Yet XOM's stock price is about 34% lower than it was when oil prices peaked in the summer of 2014. The drop is justified, at least in part, because Exxon's financial results truly have suffered along with everyone else's in the sector.
Is the Exxon worldwide enterprise really worth 34% less than it was worth last year? Surely the oil business has lost some of its allure, what with the global oversupply of energy (including primarily oil and gas, but also renewables). The market seems to believe (by definition) that XOM deserves its 34% haircut. So it becomes a question of what do you think? And do you know something the market doesn't?
What will drive Exxon's and the energy sector's businesses looking forward over the next 12-18 months? I suppose the driver will be some combination of oil & gas prices (supply & demand-driven), mergers & acquisitions (M&A), and company-specific operating performance. The most recent S&P Capital IQ report on XOM describes a company whose production capabilities and efficiencies – like those of the industry – continue to improve markedly. The analyst (S. Glickman, CFA) further believes Exxon will continue to be active in M&A.
Exxon's revenue declined to about $66 billion in the 2nd quarter, from just over $100 billion a year earlier (coincidentally, 34%). Earnings fell to $1.00 per share from $2.05 in the same time. But markets look forward, not backward. S&P projects earnings to slowly creep back up, to $1.06 in 3Q and $1.11 in 4Q.
Of course, much of XOM's stock performance will continue to depend on oil prices and sentiment, which are the short-term drivers. In the longer run, the market weighs out winners and losers. XOM, in my humble opinion (or IMHO, as the kids say), is nearly certain to be one of those winners.
Should energy stocks be on your shopping list?
It's too early to make energy a big theme in your portfolio yet, "IMHO." But I also believe it's time to start building your energy stock "watch list."
Ultimately, demand for energy isn't going away, nor are the strongest producers. Even though the global supply glut may keep a powerful lid on oil & gas prices for quite some time, the turmoil in today's markets is creating opportunities for the strongest players even as we speak.
Exxon itself – or one of the other majors – may be a candidate to consider. XOM closed 0.01% lower on Tuesday – a day that saw the S&P 500 lose 1.35%. The broad energy sector ETFs, such as XLE and IYE, may be another good place to start your shopping list, rather than trying to rifle-shoot individual winners and losers. Either way, just watch the MarketClub Trade Triangles as timing indicators to help you manage risk. Right now, technicals still say it's too soon. But markets can turn quickly and powerfully in the positive direction as much as they can in the negative direction. Have your list ready.
INO.com Contributor - Energies
Disclosure: At the time of post publication, this contributor does not own any securities mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.