As 2016 starts on a volatile note, energy investors will want to keep an eye on a few different stocks. The energy sector is one of the largest and most diverse in global markets today and it is not uncommon for some parts of the sector to be moving up while others are moving down. To get a feel for how the sector overall is doing, it’s useful to keep track of a bellwether high profile company in each area of the U.S. energy markets.
Exxon Mobil (XOM)
First up, investors need to understand how established blue chip oil companies are dealing with the continuing catastrophe of U.S. oil markets. Virtually all companies across the entire energy space are reeling after the punches they took in 2015. 2016 MIGHT be different. One can hope at least. Investors looking to gauge the health of the sector need only look to Exxon Mobil. The bluest of blue chips, when investors see XOM’s stock stabilize it should indicate that better times are coming for the rest of the sector. XOM probably won’t have as much upside as many of the riskier energy companies out there, but as long as Exxon’s business is suffering, one can be sure that financially weaker companies are in even more distress. Related: Leaving 2015 Behind, Will 2016 See Oil Rebound?
Devon Energy (DVN)
Among the new breed of shale companies that have come to dominate U.S. oil production over the last decade, Devon has been among the best at weathering the current downturn. The company is still one of Wall Street’s favorite names, and its management has been very diligent in focusing on supply chain efficiencies for the firm. Nonetheless, Devon’s stock has still had a rough year and that is unlikely to change in the next quarter. Longer term though, Devon should be one of the shale companies that emerges from the current downturn well positioned to capitalize on weakness among competitors.
With all of the ink spilled over oil majors and shale companies, it’s easy to forget that many months before most energy companies started feeling the pain of the current slump, the deep water drilling group was sinking fast. Every deep water driller out there has seen their stock cut in half or more over the last 18 months, and in many cases, stock prices today are 25 percent or less of what they were at their peak a few years ago. Industry giant Transocean is no exception. The Street is widely pessimistic on RIG with short interest at roughly a third of outstanding shares suggesting that many investors are piling into an old trade expecting more downside. With the stock trading around $12 a share it’s unclear how much more downside there can be short of an eventual bankruptcy filing which looks very unlikely based on the firm’s financials. Deep water will likely be one of the last groups to recover when oil prices start to rise, so investors should keep an eye on RIG’s stock for a possible late inning recovery opportunity. Related: Peak Oil Production Is Still Years Away
Kinder Morgan (KMI)
Finally, many investors had thought that while oil companies would suffer during the downturn, pipeline firms with their utility-like structures would find their stocks more immune. That has not happened in most cases. The bellwether in the group, Kinder Morgan exemplifies this with a stock that has fallen from almost $45 in May to around $15 today. There have been too many developments for KMI to go into in depth, but management’s recent dividend cut and the previous reorganization of the Kinder Morgan family of companies under a single corporate umbrella both suggest that KMI’s management team thinks the company needs to adapt to a permanently different set of capital market conditions. Less dependence by KMI on capital markets may be good for the stock in the long run, but the process of getting to that long run has been painful. Investors should keep an eye on KMI’s stock during 2016 to assess when this group becomes investible again.
The energy sector looks set to continue with a rough first quarter in 2016. Notwithstanding platitudes about buying when blood is running in the streets, investors would still be wise to keep an eye on the energy sector in the hope that the situation improves or at least stops deteriorating.
By Michael McDonald of Oilprice.com
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