A forgettable year for energy stocks takes another turn lower
Some analysts questioning whether oil producers can make money at these low prices
AMRITH RAMKUMAR The latest slip for U.S. energy stocks is raising questions about whether oil-and-gas producers can stem the rout.
Shares of energy companies largely missed out on a robust oil-price rally in the first nine months of the year. The S&P 500 energy sector peaked in May, with a year-to-date gain of 8.6%, when oil was trading at about $70 (U.S.) a barrel. The shares failed to rally higher even as U.S. crude prices surged above $75 in early October.
The lag in energy stocks was a sign of investor skepticism about the rally as the U.S. produced record amounts of crude and overtook Saudi Arabia and Russia as the world’s largest producer earlier this year, analysts say.
But energy stocks have also been hit hard during the continuing oil-price rout, with shares down 23% since the start of October and flirting with their worst quarter in a decade. Crude is off more than 35% in the quarter, on track for its largest such drop in four years, while the broader S&P 500 is down 14% and heading for the largest quarterly decline since 2011.
A range of energy firms have slumped. Oil-field services companies Halliburton Co. and Schlumberger NV are down more than 40% for the year, while exploration and production companies including Devon Energy Corp. and Cimarex Energy Co. have also tumbled that much in 2018.
Some investors are skeptical U.S. shale producers can stem the tide, with many needing to churn out oil to remain profitable and boost supply to pay down debts.
“People appear to be pricing in things never getting better,” said Patrick Kaser, a portfolio manager at Brandywine Global. “It’s been very painful.”
U.S. crude has dropped below $50 a barrel this week for the first time in more than a year, with a recently announced production cut from the Organization of the Petroleum Exporting Countries failing to quell fears of another glut. Anxiety about slowing demand in a weakening global economy has exacerbated those concerns, analysts say. Some energy companies are starting to respond, with analysts questioning whether they can make money at these low oil prices. Diamondback Energy Inc. cut its 2019 production targets late Tuesday, citing the oil-price slump and cash-flow estimates.
In at least one encouraging sign for energy bulls, Diamondback shares rose 3% Wednesday, making the stock one of the S&P 500’s best performers. The stock is still down nearly 30% for the year.
“It’s a sign that managements do understand that there are expectations and not just to focus on growth—that spending does factor in,” Mr. Kaser said.
Some analysts are now weighing whether shares of energy companies might be nearing a bottom, after the S&P sector hit Wednesday its lowest level since early 2016 with a fourth consecutive decline.
Some think lower OPEC output will start to lead to lower inventories soon, helping oil prices and shares of producers stabilize.
Another encouraging sign to bullish investors: U.S. invento- ries are finally starting to drop. After stockpiles rose in 10 consecutive weeks through Nov. 23, they have fallen three consecutive times, Energy Information Administration figures show. The latest data showing a drop were released Wednesday, helping crude prices stabilize, though energy stocks fell alongside the broader market after the Federal Reserve raised in- terest rates.
Some investors said further drops could help bruised investor sentiment improve. Net bets on higher U.S. crude prices are at their lowest level in more than two years and have tumbled in the past few months, according to Commodity Futures Trading Commission data. Net bullish bets set an alltime high in January.