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Plains Exploration & Production Co
Exxon Mobil Corp
Baker Hughes Inc
At a time of record fuel demand, bountiful oil and natural gas, and expanding economies, no stocks are doing worse in the world than energy producers from BP Plc (BP/) to Hess Corp. (HES)
The MSCI World Energy Index has declined 11 percent this year, more than any other group, according to data compiled by Bloomberg. The gauge has climbed 42 percent since equities bottomed in 2009, less than any industry with earnings tied to economic growth. In the U.S., the stocks are at the cheapest levels relative to the Standard & Poor’s 500 Index since 2009.
The divergence reflects the transformation of an industry where growing consumption of energy has been met with even bigger gains in supply. U.S. crude inventories are the highest since 1990 and natural gas prices have lost 36 percent in 12 months amid a glut spurred by hydraulic fracturing. Bears say energy producers, making up about 10 percent of global stocks, will keep equities from advancing. Bulls say the market will rally when their shares rebound.
“The S&P 500 will have a tough time making meaningful progress until the energy sector bottoms and begins to move higher,” Jim Russell, the Cincinnati-based chief equity strategist at U.S. Bank Wealth Management, which oversees about $116 billion, said in a phone interview on June 20. “Even though the valuations of the stocks are cheap, the fundamentals have not yet bottomed.”
The MSCI World Index slipped 0.2 percent to 1,205.67 last week, while Houston-based Plains Exploration & Production Co. (PXP) and Encana Corp., Canada’s biggest natural-gas producer, tumbled more than 9.8 percent. The S&P GSCI commodities gauge slid to the lowest level since 2010, bringing its loss since February to 21 percent, as manufacturing reports for the euro area and China indicated contractions. The S&P 500 fell 1.6 percent today while the MSCI World lost 1.4 percent.
Energy stocks are trailing the S&P 500 by 43 percentage points since March 2009. Exxon Mobil Corp. (XOM) and Baker Hughes Inc. (BHI) are up less than 40 percent since then, while the U.S. equity gauge almost doubled. In the last bull market, which ended in October, 2007, the industry surged 242 percent, better than any industry and more than double the full index.
That rally occurred as earnings from oil and gas explorers and refiners climbed to 12.9 percent of overall S&P 500 profits in 2007, according to data compiled by Howard Silverblatt, a New York-based senior index analyst at S&P. The proportion has since fallen to 10.7 percent.
Energy companies are the only U.S. industry whose earnings forecasts have been revised from growth to contraction in 2012, based on more than 10,000 analyst estimates tracked by Bloomberg. Profits for the group will drop 5.8 percent, the projections show. In January, analysts predicted income would climb 2.2 percent. Earnings in the entire S&P 500 are forecast to grow 7.4 percent this year.
Since 2000, there had been two times when energy shares lagged behind the S&P 500 for four months or more, according to data compiled by Bloomberg. The U.S. equity benchmark fell on every occasion, with losses averaging 12 percent over the next three months. The last time the industry trailed for this long, the five months ended March 2010, the S&P 500 slumped as much as 16 percent from April through July.
“The energy sector might be weaker for longer,” Joseph Quinlan, New York-based chief market strategist with U.S. Trust, which oversees $333 billion in client assets, said in a June 20 phone interview. “It’s cyclically driven by weaker global demand and therefore weaker earnings outlook.”
Advances in technology that made it easier to find natural gas have pushed its price down as much as 86 percent during the past four years, reaching the lowest level in a decade in April. Horizontal drilling and hydraulic fracturing, a technology used to get petroleum and natural gas from shale-rock formations, have become standard extraction techniques in America.
The natural gas boom helped the U.S. meet 81 percent of its energy demand in 2011, the highest level since 1992, according to U.S. Energy Department data compiled by Bloomberg. The slump in gas prices prompted companies to try to offset falling profits by boosting spending on oil drilling.
Gas futures rose 6.4 percent last week to $2.625 per million British thermal units on the New York Mercantile Exchange. The contracts have fallen 9.9 percent in 2012.
“A very large supply of natural gas is good news in a sense that we are actually getting energy independent as a country,” Dean Junkans, chief investment officer for the wealth management, brokerage and retirement units of San Francisco- based Wells Fargo & Co., which oversees $1.3 trillion in client assets, said in a June 20 telephone interview. “But that probably put pressure on oil price and the stocks of energy companies.”
Brent crude futures, the benchmark for two-thirds of the world’s oil, averaged $118.45 a barrel in the first quarter, up 12 percent from a year earlier. Oil in New York tumbled below $80 a barrel last week and Brent fell below $90 on concern demand will slow amid rising supplies.
The Organization of Petroleum Exporting Countries has exceeded its output limit of 30 million barrels a day this year as the prospect of sanctions against Iran, the group’s second- largest member, pushed Brent to a four-year high in March. In the U.S., production climbed 1.9 percent to 6.35 million barrels a day in the week ended June 15, the highest level since February 1999, according to a report from the Energy Department this month.
The S&P 500 Energy Index traded at 5.34 times the price of oil in the second quarter, according to data compiled by Bloomberg. That’s down from the average ratio of 7 in the past two decades.
The plunge in shares of fuel producers has reduced valuations to 9.50 times 12-month earnings, Bloomberg data show. That’s 28 percent below the S&P 500’s multiple of 13.3 and the widest discount since September 2009.
Jonathan Golub, the chief U.S. market strategist at UBS AG, said energy stocks are attractive. He boosted the industry to overweight from market weight, meaning investors should hold the shares more than their weight represented in benchmark indexes.
“We believe oil prices will rebound as macro concerns fade and prices become more closely driven by supply and demand,” Golub, based in New York, wrote in a June 18 note.
Global oil consumption is forecast to reach a record 89.9 million barrels a day this year, according to the Paris-based International Energy Agency. The world economy may grow 2.3 percent in 2012 and 2.8 percent in 2013, based on the median estimate from economists surveyed by Bloomberg.
BP, Europe’s second-biggest oil producer, has dropped 13 percent this year. About a third of the 32 analysts covering the London-based BP have cut their 2012 profit forecasts during the past four weeks. That reduced the average income estimate to $1.06 a share, compared with $1.15 last year, according to data compiled by Bloomberg.
Hess fell 30 percent, more than three times the S&P 500 Energy Index. The New York-based oil company reported first- quarter earnings that missed estimates and lowered its oil- production estimate for the Bakken Shale formation in North Dakota. Almost half of the company’s market value has been wiped out in the past 12 months.
Exxon, the world’s largest energy company, said a drop in U.S. natural gas prices hurt first-quarter profit by more than $300 million. Exxon’s production was 51 percent oil and 49 percent gas last year, according to data compiled by Bloomberg.
Six of the 19 analysts tracked by Bloomberg reduced their profit estimate for Irving, Texas-based Exxon in the past four weeks. Per-share income will probably fall 4.3 percent to $8.06, the first annual decline since 2009, analysts’ forecasts show. The stock has slid 7.1 percent from this year’s high in January.
The decline in energy shares has cost investors about $112 billion this year, according to data compiled by Bloomberg. The S&P 500 rallied 97 percent since a 12-year low on March 9 through June 22, 2009. Were energy stocks excluded, the benchmark measure would have surged 111 percent to 1,426, exceeding this year’s peak of 1,419.04, according to estimates by Birinyi Associates Inc., a Westport, Connecticut-based research and money-management firm.
“The market is going to continue to be challenged and volatile and energy is one of the components,” Stephen Wood, the New York-based chief market strategist for North America for Russell Investments, said in a phone interview on June 21. His firm oversees $155 billion. “In this environment, energy prices are a consequence, not a cause.”
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