Oil and gasoline are up, but large-cap energy stocks are lagging
Jun 12th 2009 2:45PM
Updated Dec 4th 2009 2:19PM
The sharp spike has mimicked the rally underway in light crude, which is now above $70 per barrel after touching prices in the $30s at several points earlier in the year. Bespoke Investment Group notes the unusual combination of magnitude and speed behind this move, saying that "the current rally in oil [has] nearly twice the average bull market gain in nearly half of the average duration."
Investors in major energy stocks, however, haven't participated. Exxon Mobil (XOM), Chevron (CVX), and ConocoPhillips (COP) are down between five percent and 15 percent year-to-date, while the S&P 500 is up slightly. In a research note initiating coverage on Integrated Oils, Collins Stewart analyst Katherine Lucas Minyard cited Exxon Mobil as the stock least leveraged to the price of oil, saying investors would rotate out of the company's shares in the event of a rally. She rates all three stocks as "Hold." Instead, seek out companies with the ability to create noticeable additional value through exploration or production, such as Hess (HES) or Marathon Oil (MRO), both of which she rates "Buy."
Crude inventories have been rising steadily as a recession-driven falloff in demand has more than offset production decreases, but Collins Stewart believes the long-term picture is more bullish for crude prices. The credit crunch has impacted financing for energy projects, and with the long lead times to bring new supply online, this could result in future shortages. The firm's long-term price target for crude is $80 per barrel, though it expects prices for a barrel of crude to average $65 in 2010.
The underperformance of the integrated majors is largely attributable to their downstream refining operations, says Ann Kohler, Managing Director at Caris & Company. "The fundamentals for the refining industry have not been very good, and have actually deteriorated since the beginning of the year." Smaller, leveraged pure play exploration and production companies have benefited disproportionately from the rise in crude prices. Kohler pointed to Pioneer Drilling (PDC), which has nearly doubled since the huge move in oil prices started in March, and Venoco (VQ), which has nearly tripled in the same time.
As for the sustainability of the move in oil, Kohler was skeptical. "Fundamentals for oil are extremely weak," she said, explaining that inventories are at multi-decade highs. Instead of trading on its own fundamentals, "there is concern that the domestic monetary and fiscal policy will be very inflationary," and this is causing money to flow back into oil. Eventually, this price move will reverse as a lack of demand and higher production levels from cash-strapped OPEC nations reassert themselves, leading her to have a second-half target of $52 per barrel.
More on energy: on BloggingStocks, Jim Cramer says that it's time for oil companies to lock in high prices.