Despite a poor start, 2010 finished as a “wonderful year” for
energy investors, with more than 65 percent of oil and gas stocks
delivering positive returns last year, according to the IHS Herold
2010 Energy Peer Group Stock Market Performance Report, which was
just released by information and insight provider IHS. Driven by
economic growth, crude prices, which hit bottom in late May 2010 at
around $65 per barrel, rose steadily and consistently through the
second half of the year, and took oil company shares with them.
The median gain for the 503 stocks covered in the report was 21
percent, which, while it did not match the record-setting 59
percent gain posted in the 2009 IHS report, did outperform the
market indices of nearly all Organization for Economic Cooperation
and Development (OECD) countries. Total capitalization jumped by
more than $300 billion, further reducing the severe losses the
sector incurred in 2008 the report said, but did not extinguish
them.
“Sometime in the first quarter of 2009, equity markets began to
move upward in response to the economic growth that was becoming
apparent in OECD countries,” said Robert Gillon, senior vice
president and co-director of energy equity research at IHS. “It
seemed as though every statistic that confirmed expansion was under
way was reflected in a rise in the price of crude, which boded well
for oil stocks. That pattern continued throughout the year, with
oil prices and oil shares at a recovery high at the closing bell of
2010. In particular, North American oil stocks delivered the most
returns to their investors.”
After finishing second-to-last as a peer group in 2009, U.S.
Royalty Trusts earned redemption by taking top honors in 2010 as
the best performing peer group reviewed, posting a gain of more
than 44 percent. MV Oil Trust led the group by posting a return of
111 percent.
Companies in the E&P Limited Income Partnerships group
followed closely with gains of nearly 43 percent. According to the
IHS report, these survey-leading returns were in response to
monetary stimuli by numerous central banks, where open-market
interest rates fell to the lowest levels seen in decades, which
forced yield-conscious investors to take on more risk in order to
maintain their desired level of income.
“The vast amount of liquidity being injected into the economic
system, particularly in the U.S. has resulted in a strong
correlation between equity prices and oil prices,” Gillon noted.
“By contrast, for many years prior to 2009, there was a reverse
relationship, with higher crude prices perceived to cause a
reduction in disposable income, lower consumer spending, and
declining domestic product and stock prices. To our mind, this is
the normal state of affairs, but to predict we will be back to
normal in short order would be unwise.”
Mid-sized U.S. E&Ps, led by McMoRan Exploration Company,
generated a segment return of nearly 42 percent, outperforming
every other group of oil and gas producers globally. McMoRan
delivered a total return in 2010 of nearly 114 percent.
As a group, Master Limited Partnerships — mostly pipeline and
storage companies — enjoyed a hearty gain of nearly 35 percent,
while the peer group of Integrated Oil Stocks with U.S. Downstream
returned 22 percent, which was marginally above the survey average.
Canadian Integrated Oil Stocks and Integrated Oil Stocks without
U.S. Downstream Operations gained less than half that amount, at 10
percent and nine percent, respectively. Returns from the latter
group, the report said, were dragged down by the generally poor
performance of European markets. On the other hand, shares in the
Refining and Marketing category offered a healthy median gain of 38
percent and did well globally as demand for distillates rose with
increasing economic activity.
EnCore Oil plc of the U.K., whose shares rocketed by 773 percent
following the discovery of the Catcher field in the U.K. sector of
the North Sea, was the runaway leader of the Smaller E&P
Companies Outside North America, but among companies starting at
more than $0.50 per share, Xcite Energy Ltd. of the U.K. stole top
survey honors for best total return of 552 percent due to its North
Sea heavy oil project. Notably, Xcite Energy was also the top
performer in last year’s survey.
Pacific Rubiales Energy enjoyed splendid results with its heavy
oil development program in Colombia, and the sizzling gain of 131
percent placed the company at the top of the list of Largest Oil
and Gas Producers for a second year in a row. CNOOC Ltd. maintained
the title of largest capitalization amongst the Largest Oil and Gas
Producers by a very wide margin. The Chinese producer, which had a
steaming 56 percent total return, is the first in this sector to
have its market valued exceed $100 billion.
Amongst the Largest Integrated and Diversified Oils, top-ranked
Ecopetrol’s 84 percent gain reflected rapidly growing oil
production, and it also got an updraft from the soaring Bogota
market. Sunoco Inc. and Valero Energy, last year’s bottom two
performers in the Largest Integrated and Diversified Oils group,
moved into the top 10 due to a dramatic turnaround in refining
margins. BHP Billiton is the only member of the 2009 crop to repeat
in the top 10 this year.
In a stunning turnaround, nine of last year’s top 10 finishers
fell to the bottom half of the table in 2010, with Petroleo
Brasileiro and Rosneft Oil, numbers one and two in the previous
ranking, being hit particularly hard. Thanks in part to the Greek
financial crisis, European markets were among the worst-performing
financial exchanges and companies there had a tough 12 months, the
report noted. Eni, Spa and Husky Energy repeated in the group’s
bottom 10. BP p.l.c., as anticipated following the Deepwater
Horizon incident, suffered through a horrendous year and now ranks
eighth by capitalization, down from second in 2005.
While oil stocks carried the sector in 2010, continued weakness
in the North American natural gas market did not prevent the large
producers from generating solid shareholder returns, with the
median performance of the group nearly matching that of the entire
survey. However, a high concentration of North American natural gas
in the production mix detracted from returns, since U.S. natural
gas spot prices, which began the year at what now seems like the
lofty price of $6/MMBtu, ended the year at a nine-year low for the
date, which was about 30 percent below where they began. This led
to the denouement of Southwestern Energy, which had been a stellar
performer in the previous three years, the report said.
“Natural gas inventories were well above average, and U.S.
domestic production showed no signs of topping out,” Gillon added.
“Fortunately for everyone but the Europeans, it has been
ferociously cold in Europe, so gas is being shipped to the higher
priced markets. The world is well supplied with gas, and the modest
upward slope to the current futures curve is testimony to the glut
in supply.”
Stocks in the Alternative Energy group, held the basement
position as worst in class, posting losses of more than 24 percent
after gaining 26 percent in 2009. Said Gillon, “We’re not sure what
to say about alternative energy, except perhaps a requiem. In the
five years we have shown this segment in the survey, it has been
the worst performing group twice, second worst twice, and soared to
fourth from the bottom on one happy occasion. They suffer when
natural gas prices go down, when government subsidies are cut, when
the wind doesn’t blow, when it blows too much, and when the sun
doesn’t shine. There may be other problems as well, which we will
probably find out about in 2011.”
For more information on the IHS Herold 2010 Energy Peer Group
Stock Market Performance Report and the IHS equity research
service, please contact sales@herold.com. To speak with IHS analyst
Robert Gillon regarding the IHS Herold 2010 Energy Peer
Group Stock Market Performance Report, please contact
melissa.manning@ihs.com, or press@ihs.com.
About IHS (www.ihs.com)
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