POON WATCHARA-AMPHAIWANDon’t Give Up on Energy Stocks
V
alue hunters, who buy what
other investors shun, are facing
a tough decision these days. Al-
though the rest of the market has been
surging, energy stocks have collapsed. Is
oil over? Or is this an incredible buying
opportunity, like technology shares in
2002 or practically anything in 2009?
I’m an opportunist. But the extent
of the carnage in the energy sector is
important to understand. Most energy
stocks are tied to the price of petro-
leum. In June 2014, West Texas Inter-
mediate, the North American crude oil
benchmark, was $107 a barrel. At the
end of 2019, it was just $51 and change.
Natural gas dropped over the same
period, from $4.79 per thousand cubic
feet to $1.84.
That is the main reason McDermott
International, the venerable provider
of oil and gas construction services
(founded in 1923), filed for Chapter 11
bankruptcy in January of this year.
The stock, which traded as high as $26
at the start of 2018,
closed at 70 cents
on January 21,
when trading on
the New York
Stock Exchange
was suspended.
Shares of off-
shore driller Noble
have dropped 90%
in less than two years. Range Re-
sources, bleeding red ink, has sus-
pended its dividend. Chevron recently
took a $10 billion hit by writing down
the value of its U.S. shale properties,
which had once seemed so promising.
In 2008, energy accounted for 13%
of the total market capitalization of
Standard & Poor’s 500-stock index,
rivaling health care and technology;
today, energy represents less than 4%.
Energy Select Sector SPDR (symbolXLE), a popular exchange-traded
fund that tracks the energy stocks in
the S&P, has dropped an annual aver-
age of 3.2% over the past five years,
compared with an annual gain of
12.4% for the index as a whole. (Prices
and other data are as of January 31.)
This dismal performance is all the
more remarkable because the ETF is
dominated by giant integrated energy
companies. The giants make money
from operations both upstream (find-
ing petroleum and getting it out of the
ground or the ocean) and downstream
(refining and selling it to consumers
or turning it into chemicals). When oil
prices fall, hurting the upstream busi-
ness, so do prices for the raw material
used in the downstream business.Awash in oil and gas. Like the prices
of other commodities, petroleum
prices respond to supply and
demand. Thanks to new
technolog y, explorationand production
companies can,
at relatively
low cost, ex-
tract oil and
gas from pock-
ets previously
too hard or
too expensive
to reach. As
a result,
supply,especially in the United States, has
risen sharply. Domestic oil produc-
tion more than doubled from 2011
to 2019, and natural gas production
has increased by more than one-third,
according to Energy Information Ad-
ministration data.
OPEC, the once-powerful oil cartel,
has lost much of its punch to market
forces as new sources outside the
Middle East have been playing bigger
roles. Four of the top five oil produc-
ers aren’t even members. (The big-
gest producers, in order, are the U.S.,
OPEC heavyweight Saudi Arabia,
Russia, Canada and China.)
The notion of “peak oil,” which be-
came fashionable 15 years ago, is now
considered humorous. The key vari-
able in supply is extraction. When oil
prices rise, companies drill for more.
As production increases, prices fall—
which spurs drillers to shut down
rigs, which causes prices to rise
again, and so on.
This cycle is ref lected in
the rig count. The count was
about 2,000 when oil prices
were riding high in 2014.
Then prices dropped,
and rigs fell to
about 400 in
mid 2016,
leading to
another
bump in
prices.
A recent
Bloom berg
headline
said the
“price col-
lapse” has
drillers “hit-
ting the brakes.”
Baker Hughes, the oil
field services giant,THE WORLD IS AWASH IN OIL AND
GAS. THE NOTION OF “PEAK OIL,”
FASHIONABLE 15 YEARS AGO, IS
NOW CONSIDERED HUMOROUS.STREET SMART James K. GlassmanINVESTING32 KIPLINGER’S PERSONAL FINANCE^ 04/2020