What is the market telling us about oil & gas stocks?
EDITOR'S NOTE
A historic squeeze in energy prices is underway. So why are investors shrugging it off?
Oil and natural gas prices are trading around a seven-year high. So let's look at how the world valued energy stocks back in 2014, and how it does today.
Beginning with Exxon. As I wrote yesterday, back then, Exxon was the world's most valuable company--bigger than Apple!--with a peak value of around $450 billion. Today, even after rising 46% this year, it's worth about $250 billion; a tenth the size of Apple, half the value of Nvidia, and around the size of Adobe. The company has a history of recent missteps that have left investors feeling burned, as you can read here.
What about Chevron? Unlike Exxon, it's still in the Dow. It's worth around $205 billion today after a 25% gain this year. But back in 2014, it was worth more than $250 billion. Same goes for Pioneer, a major Permian player whose shares traded up to $230 last time oil prices were this high, but are at $180 today even after surging almost 60% this year.
Why the discount? Perhaps, as the saying goes, fool me once, shame on you, fool me twice, shame on me. Energy investors have had to swallow a decade of poor returns. Even as the shale revolution helped the U.S. become the biggest global oil producer, it failed to deliver for many shareholders, as detailed here. Aside from the raft of bankruptcies (more than 200 since 2015), consider Occidental's debt-fueled purchase of Anadarko, which created an $80 billion company in 2019 that is worth less than $30 billion today.
The energy sector as a whole has dwindled from a peak of more than 15% of the S&P 500 in 2008--the year oil spiked above $100 a barrel--to around 11% in 2014, to barely more than 2% today. As we talked to energy investor Stan Majcher about earlier this week, he would like to see a lot more consolidation to bring the dozens of remaining shale players down to a handful of larger, more efficient firms.
So yes, you can blame policy makers for the energy crunch that's spiking prices right now, like Harold Hamm was quite vociferous about yesterday on Power Lunch. But the energy sector itself has performed so poorly--even in the Trump years--that it can't attract the cash it once did. Those headwinds are even bigger now that ESG has taken the market by storm.
And this is why investing in commodities can be so difficult. It's simply hard to keep prices high. If investors hold the line, prices stay high, inducing more new entrants and competition that expand output and collapse prices again. If instead they flood the zone to take advantage of today's high prices, you get bigger output spikes in the near term that are also likely to overwhelm demand and drop prices again. This is why OPEC exists.
And even if ESG succeeds in an OPEC-like structurally higher cost of oil and gas, you get competition from renewables that then renders the existing energy players obsolete. Investors have every right to be nervous.
See you at 1 p.m!
Kelly
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