MoneyBeat: Energy Shares Decline Faster Than Oil Prices -- WSJ
October 17 2019 - 3:02AM
Dow Jones News
By Ryan Dezember
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (October 17, 2019).
Horrific. Terrible. Abysmal. The worst. Those are terms equity
analysts are using to describe investors' attitude toward energy
stocks.
Shares of exploration-and-production companies, along with
oil-field-service firms, have fallen even more than crude prices
this year. A five-year slump in oil prices as well as even longer
bouts of rock-bottom natural-gas sales and profligate spending has
caused investors to sour on the sector.
While U.S. oil prices have lost about 26% over the past year,
the SPDR S&P Oil & Gas Exploration & Production
exchange-traded fund, a widely cited barometer, has lost nearly
half of its value, accounting for dividends. Meanwhile, the PHLX
Oil Service Index, a basket of 15 companies that help oil producers
unearth oil and gas, is down 54%.
Of 73 U.S.-based exploration-and-production companies tracked by
The Wall Street Journal -- ranging from the $292-billion-market-cap
Exxon Mobil Corp. to recently bankrupt EP Energy Corp. -- only one
has shares that have gained value over the past year: Hess Corp. It
has added 0.8% following a huge oil discovery off the coast of
Guyana. More than 40 of these companies have lost at least half of
their stock market value over the past 12 months.
Service company shares have performed poorly too, from sector
leader Schlumberger NV, down 45%, to Weatherford International PLC,
which basically wiped out shareholders when it filed for chapter 11
bankruptcy protection in June.
"It is clear that sentiment remains as challenging as anything
we have ever seen," wrote analysts with Piper Jaffray's Simmons
Energy after four days of meeting with money managers in Boston and
New York. "Interest remains anemic, and there appears a growing
consensus that the exploration-and-production business model just
won't ever work (for investors) in a $50-to-$55-a-barrel
world."
West Texas Intermediate futures for November delivery fell 1.5%
to $52.81 a barrel on Tuesday. Natural-gas futures, which ended
Tuesday at $2.339 per million British thermal units, have recovered
some from their worst summer in decades but remain about 28% lower
than a year ago.
Investors' dim view of the oil-and-gas business' prospects are
shared by energy executives.
Each quarter the Federal Reserve Bank of Dallas polls energy
executives in its territory, which covers Texas as well as swaths
of drilling land in New Mexico and Louisiana. In its most recent
survey, published Sept. 25, respondents reported declining
production, employment and wages. More than two-thirds said they
expected U.S. crude prices to end the year below $60 a barrel.
The third-quarter survey's business activity index, a broad
measure of conditions facing companies in the Dallas Fed's
district, dropped to minus 7.4, from minus 0.6 in the second
quarter. That is its lowest level since early 2016, when crude
prices dipped below $30 a barrel.
"Lack of Wall Street participation in oil is very apparent,"
said one respondent.
Another said: "I expect there will be a number of insolvent
companies looking for help in the next six months."
The bleak landscape has challenged money managers. John
Augustine, chief investment officer for the wealth-management arm
of Ohio's Huntington Bancshares Inc., said the bank has steered
clear of the exploration-and-production segment.
"It's under siege almost," Mr. Augustine said. "It's tough to go
in with conviction."
Instead, Mr. Augustine and his stock pickers have loaded up on
the integrated oil company Chevron Corp. and the refiner Valero
Energy Corp., which are paying dividend yields of 4.1% and 4%,
respectively.
Some investors have advocated and even agitated for
consolidation, arguing that duplicative overhead and executive
salaries can be eliminated while putting drilling fields in the
hands of companies that can operate the most efficiently. Yet the
stock market's reception to recent combinations has been generally
poor.
On Monday, for instance, Parsley Energy Inc., a favorite of
stock analysts that has performed well throughout the oil slump,
said it agreed to buy Jagged Peak Energy Inc., which operates West
Texas drilling fields near Parsley's. The all-stock deal valued
Jagged Peak at $2.3 billion, including debt.
Though the buyer agreed to pay a relatively slim premium to
where the smaller company's shares have recently traded and said it
would wring as much as $50 million of annual costs out of the
combined businesses, Parsley's stock lost almost 11% on the
day.
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Write to Ryan Dezember at ryan.dezember@wsj.com
(END) Dow Jones Newswires
October 17, 2019 02:47 ET (06:47 GMT)
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