The energy sector has been whipsawed by headlines lately, and many investors can’t decide whether to buy or sell oil stocks.
When oil CLX8, -2.81% raced up to a new 52-week high of more than $76 to start October, many thought things looked great. Then as U.S. oil supplies rose and as OPEC production rose, things didn’t look so hot.
And of course, there have also been challenges in the Middle East, including the onset of U.S. sanctions against Iran and the disturbing disappearance of a Saudi journalist, that have injected further uncertainty into the oil market.
Oh yeah, the S&P 500 SPX, -0.60% has been a bit choppy in general, in case you didn’t notice. The Energy Select Sector SPDR ETF XLE, -0.97% is essentially flat on the year.
So what’s the score? Should you be shopping for oil stocks now amid comparatively high crude prices? Or should investors be worried that recent headlines and marketwide volatility will take its toll on energy stocks?
A look at the details, unfortunately, show it’s likely the latter.
Fracking stocks
While the last few years have certainly provided plenty of profits to investors in fracking stocks, the most recent rally in crude oil prices have perhaps surprisingly left many investors flat.
Sure, there was a dramatic rally in 2016 for many energy stocks after crude bottomed at a low of under $27 at the beginning of the year and ran up to the high $50s by December; names like Concho Resources CXO, -1.60% Diamondback Energy FANG, -0.85% finished 2016 up more than 60% from their January lows.
In late 2017, we saw another nice run for many fracking names in anticipation of even higher oil prices. In the last three months of the year, Diamondback and Concho both added about 40% in 90 days.
But the rapid run-up in these stocks has seemed to give way to consolidation in 2018, suggesting higher oil is already priced in. Both Diamondback and Concho are slightly in the red year-to-date despite all the talk of higher oil prices and potential inflation.
There are some exceptions, of course, that have delivered profits. The share price of shale oil player Whiting Petroleum WLL, -2.55% has more than doubled in the last year, in part thanks to operational improvements. But the stock is still down a staggering 85% from its 2014 highs, so let’s not pretend Wall Street’s turnaround interest in Whiting is indicative of sector-wide bullishness.
Service stocks
Another group of stocks that has been struggling lately are oil service stocks, chief among them Haliburton HAL, -1.05% and Schlumberger SLB, -1.29% Both these names are down more than 14% since Jan. 1.
That may sound counterintuitive, since higher oil prices would lead some to think Big Oil would be readily investing in bringing their fields online. But many energy companies seem gun-shy about ramping up production too quickly right now. While the closely watched Baker Hughes rig count is slightly higher than it was a year ago, the total active U.S. rigs remain under 1,100 — down considerably from a peak of nearly 1,600 right before the oil glut and resulting price crash of 2015.
Beyond traditional players, related fracking service plays tell an even more negative story. Specialty sand supplier U.S. Silica SLCA, -3.96% is down over 30% in the last year despite higher energy prices, as is small-cap fracking servicer C&J Energy Services CJ, -1.12% If there was another wave of fracking profits to be had, these companies would be leading indicators.
As Big Oil keeps a close eye on supply, don’t expect higher oil prices necessarily mean higher stock prices for service tocks.
Major oil companies
On the surface, it would seem that higher oil prices are good for the biggest oil companies on the planet. But integrated oil giants, including Exxon Mobil XOM, -0.63% and Chevron CVX, -0.78% tell a very different tale.
The struggles of $350 billion Exxon Mobil have continued in 2018, as negativity has persisted around its large debt loads and flat production. Wall Street has also started to turn the same skepticism on Chevron, which now actually has more long-term debt — over $30 billion at the end of last year compared with $24 billion at Exxon.
Neither debt figure is going to cripple these mammoth stocks, of course, but the loans will hinder investment and perhaps eat into potential dividend growth that income-hungry shareholders demand from these blue chips. That’s why despite modest improvement in share prices lately, neither Exxon nor Chevron have come close to their 52-week highs set way back in January.
Again, there are a few exceptions in Big Oil — including once-battered BP BP, -1.15% BP., -0.91% The 2010 Deepwater Horizon disaster undercut BP in a big way — to the tune of roughly $65 billion in total penalties through early this year — but with the settlements largely behind it, some see it as a value once more. BP boasts a price-to-sales ratio of less than 0.6, roughly a third of Big Oil counterparts like Chevron, and shares are up over 5% this year. However, a close look at this stock shows clear resistance around $47, so it my be too much to expect another big move higher.
Similarly, shares of Royal Dutch Shell RDS.A, -1.36% RDSA, -1.12% RDSB, -0.86% RDSA, -1.10% RDSB, -5.50% may be up modestly in the last 12 months on renewed optimism and pricier oil, but they have struggled to set new highs after breaking out to over $70 to start the year.
Remember, these oil majors are all incredibly large and complex organizations. It’s a bit naive to think that just a few more dollars in oil can result in significant share price improvement.
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