WLL Whiting Petroleum Corp

By Ryan Dezember 

U.S. oil prices have risen by about a third this year, but shares of energy producers are being left behind the rally.

Crude's climb has done little to encourage investors off the sidelines and back into energy stocks. In fact, many investors are actively betting on energy stocks to fall. Short interest in many oil-and-gas producers was recently the highest it has been since early 2016, when oil traded below $40 a barrel.

West Texas Intermediate futures for August delivery were little changed at $60.23 a barrel Monday morning on the New York Mercantile Exchange. Brent crude, the global benchmark, gained 0.1% to $66.80 a barrel on London's ICE Futures exchange.

Meanwhile, energy stocks are generally having another down day. Shares of large energy companies in the S&P 500 traded 0.5% lower. They are up 12% on the year, but in the past three months have lost 4.5% while oil prices rose on production cuts from the Organization of the Petroleum Exporting Countries and sanctions that have taken barrels from Iran and Venezuela off the market.

Smaller energy companies in the S&P 600 stock index are down on the year, and have lost 24% in the past three months. Big losers on Monday were West Texas oil explorer Centennial Resource Development and Whiting Petroleum Corp., off 7.6% and 4.9%, respectively.

Callon Petroleum Co. traded down more than 13% after announcing an agreement to acquire rival Carrizo Oil & Gas Inc. in an all-stock deal that valued the target at $3.2 billion, including debt. Carrizo shares moved 5% higher.

"The investment case for energy is currently in shambles," said James West, an analyst at Evercore ISI who specializes in oil-field-services companies.

Behind investors' pessimism is disbelief that U.S. shale producers will be able to resist additional drilling amid higher oil prices and stick to spending plans. There is also doubt that OPEC's production cuts and the geopolitical turmoil that has damped global supply growth will be enough to balance the market.

"With operators achieving this growth in a $50-to-$55 barrel environment and most unwilling to cut activity until prices fall below $50 per barrel, it's hard for investors to want to step into this rally," analysts with Tudor, Pickering, Holt & Co. wrote in a note to clients.

The energy-focused investment bank said that many investors are uncomfortable betting on Saudi Arabia and the rest of OPEC to continue to concede market share to U.S. producers to support prices.

Since late April, money managers have been trimming the long trading positions, or bets that U.S. crude prices will climb, according to Commodity Futures Trading Commission data.

Stock investors have been more aggressively downbeat, boosting their wagers that shares of domestic exploration-and-production companies will fall. Short interest in the 42 companies that SunTrust Robinson Humphrey Inc. analysts track rose to 11.8% last month, the highest portion of negative bets on those companies since March 2016, when crude traded at about $36 a barrel.

"I get it when oil is sub-$40. Here you are basically $20 higher and yet investors are behaving very the same way." said SunTrust analyst Neal Dingmann.

The most heavily shorted stocks that Mr. Dingmann studies tended to be those with the most debt relative to earnings. As of June 28, the most recent date for which short selling data is available, nearly 30% of Callon's shares and more than 25% of Whiting's were held short.

Write to Ryan Dezember at ryan.dezember@wsj.com

(END) Dow Jones Newswires

July 15, 2019 12:07 ET (16:07 GMT)

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