Energy Stocks: Good, Bad, and Ugly

Aug. 5, 2017 12:48 a.m. ET

Hope springs eternal in the energy sector, against all evidence. But we aren’t ready to give up.

For a moment, it seemed the sector had overcome its recent woes. In July the Energy Select Sector SPDR ETF (XLE) returned 2.6%, beating the S&P 500’s 2.1% return in the month, the first time energy has topped the benchmark on a monthly basis in 2017. It was enough to get hopes up that the energy-sectors slump might finally be a thing of the past.

But then August started, and energy was pounded again. The energy ETF dropped 1.5% in the month’s first four trading days, as stocks such as


Pioneer Natural Resources



PXD 0.16281823564239195%



Pioneer Natural Resources Co.


U.S.: NYSE


USD135.34


0.22
0.16281823564239195%



/Date(1501880498980-0500)/


Volume (Delayed 15m)
:
7233227



AFTER HOURS



USD135.49


0.15
0.11083197872026009%


Volume (Delayed 15m)
:
34126




P/E Ratio
138.10204081632654

Market Cap
22983641902.5976


Dividend Yield
0.05911038865080538%

Rev. per Employee
1356270









More quote details and news »


(PXD), Concho Resources (CXO), and Apache (APA) got whacked after releasing second-quarter earnings. It’s enough to make investors—and this columnist—give up. One prominent oil trader did just that: Astenbeck Capital Management’s Andrew Hall announced last week that he was shuttering his main hedge fund.

While we aren’t ready to recommend a bet on the entire energy sector, the backdrop has improved enough to make stock- picking look appealing. For one, the dollar has been falling. If that continues, “it seems likely the price of crude oil will rise toward $60, at least, and energy stocks could be market leaders again for a period,” says Jim Paulsen, chief investment strategist at Leuthold Group.

Then there are oil inventories, which have been drawn down earlier this year than last, notes James Brilliant, co-chief investment officer at Century Management, who says inventories are at a lower level this year than at the same time in 2016. “That aspect of the inventory story is being missed,” Brilliant says.

That alone could keep oil prices from plunging.

As last week’s rout in the stocks indicated, you’d better get your picks right.


Pioneer,



6773.TO -0.9302325581395349%



Pioneer Corp.


Japan: Tokyo


JPY213


-2
-0.9302325581395349%



/Date(1501876800000-0500)/


Volume (Delayed 20m)
:
3367400




P/E Ratio
N/A

Market Cap
80028039062.5


Dividend Yield
N/A

Rev. per Employee
23067600









More quote details and news »


for one, announced it had encountered “train-wreck” oil wells that would delay some production and increase costs, although the company left its production guidance intact.

Still, the fact that Pioneer encountered these problems in Texas’ Permian basin, which was supposed to be insulated from such difficulties, caused investors to abandon the stock, which fell 16% to $135.34 on the week.

The slide caused investors to question whether other Permian stocks would face similar problems. Concho fell 9.1%;


RSP Permian



RSPP 4.012036108324975%



RSP Permian Inc.


U.S.: NYSE


USD31.11


1.2
4.012036108324975%



/Date(1501880535033-0500)/


Volume (Delayed 15m)
:
3694412



AFTER HOURS



USD30.8605


-0.2495
-0.8019929283188685%


Volume (Delayed 15m)
:
39159




P/E Ratio
172.83333333333334

Market Cap
4743546340.54657


Dividend Yield
N/A

Rev. per Employee
4069310









More quote details and news »


(RSPP), 10%; and


Parsley Energy



PE 3.241106719367589%



Parsley Energy Inc. Cl A


U.S.: NYSE


USD26.12


0.82
3.241106719367589%



/Date(1501880469404-0500)/


Volume (Delayed 15m)
:
7624738



AFTER HOURS



USD26.11


-0.01
-0.03828483920367534%


Volume (Delayed 15m)
:
11930




P/E Ratio
237.45454545454547

Market Cap
7952702961.30872


Dividend Yield
N/A

Rev. per Employee
2359320









More quote details and news »


(PE), 11%. All are Permian pure plays.

The stocks’ popularity compounded the damage from the selloff. In a note to clients last week, Goldman Sachs analyst Brian Kinsella observed that high-quality Permian stocks were “well owned,” and that the declines had caused some portfolio managers to ask where else they could put money in the oil patch, with particular interest being paid to stocks with “better returns or free-cash-flow stories.”

Kinsella recommends


Suncor Energy



SU 0.702075702075702%



Suncor Energy Inc.


U.S.: NYSE


USD32.99


0.23
0.702075702075702%



/Date(1501880521507-0500)/


Volume (Delayed 15m)
:
3280091



AFTER HOURS



USD32.9204


-0.0696
-0.21097302212791755%


Volume (Delayed 15m)
:
4851




P/E Ratio
20.23926380368098

Market Cap
68349281893.5709


Dividend Yield
3.094193249604062%

Rev. per Employee
2361460









More quote details and news »


(SU),


Chevron



CVX 0.6214018093758568%



Chevron Corp.


U.S.: NYSE


USD110.11


0.68
0.6214018093758568%



/Date(1501880466706-0500)/


Volume (Delayed 15m)
:
4519906



AFTER HOURS



USD110.24


0.13
0.1180637544273908%


Volume (Delayed 15m)
:
123606




P/E Ratio
35.692058346839545

Market Cap
207370184532.166


Dividend Yield
3.9233493778948323%

Rev. per Employee
2237720









More quote details and news »


(CVX), and


Canadian Natural Resources



CNQ 1.1976047904191616%



Canadian Natural Resources Ltd.


U.S.: NYSE


USD32.11


0.38
1.1976047904191616%



/Date(1501880523466-0500)/


Volume (Delayed 15m)
:
2719537



AFTER HOURS



USD31.9686


-0.1414
-0.44036125817502336%


Volume (Delayed 15m)
:
5946




P/E Ratio
258.53462157809986

Market Cap
48476748435.9071


Dividend Yield
2.755237120277761%

Rev. per Employee
1648830









More quote details and news »


(CNQ).

It’s possible that sentiment has gotten so bad that the market can’t recognize good from bad. Take


Hi-Crush Partners



HCLP 7.60233918128655%



Hi-Crush Partners LP


U.S.: NYSE


USD9.2


0.65
7.60233918128655%



/Date(1501880522114-0500)/


Volume (Delayed 15m)
:
2899784



AFTER HOURS



USD9.195


-0.005
-0.05434782608695652%


Volume (Delayed 15m)
:
23848




P/E Ratio
N/A

Market Cap
778306506.925583


Dividend Yield
N/A

Rev. per Employee
1154300









More quote details and news »


(HCLP), a maker of sand for fracking, which reported second-quarter earnings of 18 cents a share Wednesday, beating forecasts for 15 cents. It also reported higher pricing. The news was so good, in fact, that Hi-Crush shares opened up 11% on Thursday. Then the stock deflated on news that


Schlumberger



SLB -0.9967751392553503%



Schlumberger Ltd.


U.S.: NYSE


USD67.54


-0.68
-0.9967751392553503%



/Date(1501880414388-0500)/


Volume (Delayed 15m)
:
5323546



AFTER HOURS



USD67.6


0.06
0.08883624518803672%


Volume (Delayed 15m)
:
88069




P/E Ratio
519.5384615384615

Market Cap
94790126100.4359


Dividend Yield
2.9612081729345574%

Rev. per Employee
284820









More quote details and news »


(SLB) had applied for a mining permit to make its own sand. Hi-Crush’s shares dropped as much as 7%, as investors worried that its pricing power would fade quickly.

Barbara Ann Bernard, chief investment officer of Wincrest Capital, notes that Hi-Crush is priced for a nearly 30% drop in sand prices, despite the fact that customers are willing to pay ahead for a three-year supply of sand. She thinks sand prices could rise by close to 30%, as demand for frac sand outpaces supply—even with new capacity being brought on.

“Any time you see a stock up 10% or more, then down 10%, sentiment is divorced from fundamentals,” Bernard says, adding, “It’s such nonsense.” 

Email: ben.levisohn@barrons.com

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