Big oil gets little love with toxic troika shadowing revival
For generations of investors, ExxonMobil has been a cornerstone of fund managers’ portfolios alongside the biggest names in corporate America. Not so much any more.
From leading the S&P 500 Index a decade ago, the company has dropped to the ninth-largest in a top 10 now dominated by technology giants. Its rivals Royal Dutch Shell and Chevron aren’t faring much better, with investors demanding unusually high dividend yields to hold the stocks.
At fault: a toxic troika that combines gushing supply with fears that longterm demand will flat-line as electric vehicles and renewable energies grow, and climate change policies proliferate. And while cash flow for oil’s majors in 2018 is likely to be the highest in 12 years, investors are largely unmoved.
“Earnings have started to come through but no one believes it’s sustainable,” said Kevin Holt, who helps manage $934 billion at Invesco Ltd. in Houston. “That’s why the stocks haven’t worked even though the commodity has gone up. Everyone’s saying they don’t believe it.”
Years of elevated spending on mega projects worldwide caused costs to soar. That kept drillers from taking full advantage when oil prices were averaging about $95 a barrel in 20112014, and it left them exposed when a stubborn two-plus year rout took hold. In February, the weighting of energy stocks in the S&P 500 dropped to 5.5 percent, the lowest in 14 years.
Beyond the S&P, Big Oil’s weighting in global equity indices is now at a 50-year low, Goldman Sachs said in a March report. Of the MSCI World Index’s 100 biggest stocks, only six are oil producers.
The tepid interest in oil “is reflective of a significant paradigm shift in the global energy landscape,” Paul Cheng, an oil equities analyst at Barclays in New York, said in a note to clients. “Investors, particularly generalists, seem to be growing increasingly skeptical of the long-term value of oil and gas assets given the supply and demand risks posed by shale oil and EVs.”
Big Oil’s top executives will attempt to combat these concerns this week, when they announce firstquarter results. Crude prices have climbed 51 percent in the last 10 months while costs have been cut by so much that some companies are earning more at $65 a barrel than when oil was worth more than $100. The first quarter earnings reporting season starts April 25 with Statoil.
In theory, the surge in cash flow should encourage institutional investors to buy shares, as it all but guarantees future dividends. Yet, there’s a strong sense among some investors of deja vu, as companies have in the past used the recovery to boost capital spending in new projects, over time squeezing their cash generation.
“There’s a degree of skepticism about how companies are going to react through an oil price upturn again,” said Iain Pyle, investment director of U.K. equities at Standard Life Aberdeen, which has $929 billion under management. “The feeling is that if oil goes up they’ll give away some of that value.”
Oil executives acknowledge that it’s too soon to win back investors.