By Ryan Dezember
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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