Wall Street’s Energy Romance Fading
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
Love affairs die fast on Wall Street. Take energy stocks, everyone’s darlings early this year, when the price of oil passed $100 a barrel. After that milestone, many energy shares boomed, racking up gains of as much as 30% to 50% as oil surged to a mid-July record of $147.27. But then many tumbled as oil reversed course, skidding to the low 120s.
Indicative of a love affair turned sour, last month the S&P 500 energy index fell 14%, its biggest monthly decline since Standard & Poor’s began tracking sector performances in 1989. An even worse drop, 19.7%, was recorded by the American Stock Exchange’s index of small-cap energy producers. Overall, energy shares are down about 11% this year.
Another souring sign is the sagging market performance of ExxonMobil, an institutional darling and high up on many brokerage buy lists. Despite the enthusiasm, though, its shares, now $79.72, are on the skids, down about 16% from their 52-week high of $95.12 and looking like they’re headed lower. In addition, there’s a rising Exxon short position (a bet the stock price will fall), currently standing at 43.5 million shares.
So what next for the stumbling energy stocks? The overriding view is that risk still abounds in the sector, but in the long term the bull market will remain intact.
As one former energy adviser to Carl Icahn, Alan Gaines, puts it: “Any bounce in energy stocks now is a dead-cat bounce, but long term, it’s still a group to own.”
Oppenheimer & Co.’s well-regarded veteran energy analyst, Fadel Gheit, also cites near-term concerns. “You don’t try to catch a falling knife,” he says. “Global oil demand is slowing, Chinese demand will also go down after the Olympics, and American demand is down by 3%.”
Oil prices, he says, could break $100 before the dust settles, although it might take another six months before that happens. Fundamentally, he thinks oil, which closed Friday at $125.10, should be selling below $60, based on actual supply-demand factors.
In mid-May, I reported that Mr. Gaines, who has a $100 million-plus stock portfolio, predominantly in energy shares, had embarked on a mini-selling spree aimed at reducing his energy holdings, some of which dated back 15 years, by about 33% to 50%. Included were Chesapeake Energy, Comstock Resources, Range Resources, Carrizo Oil & Gas, Stone Energy, and Arena Resources.
Mr. Gaines made it clear he wasn’t selling because he had soured on the industry. Rather, he felt near-term that a number of energy stocks, which had run up some 25% to 40% in the months prior to mid-May, were fairly valued and vulnerable to stiff declines.
His timing was dead-on. The only problem was he didn’t sell enough, as the group subsequently took a drubbing, especially the high-flying shale plays.
Spurring the drop in energy stocks were slowing global economies, leading to reduced oil demand; a peppier dollar (oil is traded in dollars), and fears of new oil trading regulations, which could diminish speculative fever, a major factor behind the oil price hike.
About two weeks ago, Mr. Gaines, currently chairman of a small Houston-based oil and gas producer, Dune Energy, told me he was about to resume purchasing some of the energy stocks he had sold, as well as building stakes in new ones.
No more, though. He’s now had a change of heart, one that largely reflects the drop in oil prices. Before buying again, he wants first to see some price stabilization in oil. “I’m waiting for the stocks to become pariahs, for everyone to hate them and nobody to want them,” he says. Or put another way, “I’m waiting for the ultimate regurgitation, the height of negativism.”
Although he believes the carnage is largely over, Mr. Gaines says the negative mood is such he could see oil drop to between $110 and $115 a barrel by September, with energy stocks correspondingly falling another 15% to 20%.
Despite their recent weakness, he feels that any further declines in energy shares should be viewed as potential buying opportunities because, as he sees it, “the long-term bull market in energy remains very much in place.” In support of this, he points to dwindling supplies, increased consumption, and very little incremental capacity for sweet crude oil.
His six favorite energy stocks, viewed as potential 50% to 100% gainers over the next two to three years, are Chesapeake Energy, Exco Resources, Petrohawk Energy, Marathon Oil, Newfield Exploration, and Range Resources.
Another long-term bull who sees near-term vulnerability for oil, possibly a drop to $110, is S&P’s chief investment strategist, Sam Stovall. His top picks for the long run: ExxonMobil, Kinder Morgan Energy Partners, Transocean, and Superior Energy.
dandordan@aol.com