Expectedly, the crash in oil demand and prices has crushed oil and gas stocks to the point of making the energy industry the worst-performing sector this year.
Not only is the oil and gas industry the biggest market loser of 2020, but it has also now become the worst performer on the market—ever.
This year's oil price plunge is like no other crash in the past that has battered the shares of oil and gas companies.
The pandemic-driven crisis in the oil industry added to the ongoing concern of investors about putting their money into the fossil fuel industry while many governments and some of the largest institutional investors are increasingly looking at supporting and investing in low-carbon energy solutions. An irreversible trend toward a growing share of renewable power sources in the world's energy mix and the growing societal and investor awareness about climate change and carbon emissions had started to weigh on the oil and gas stocks even before COVID-19.
Not even the promises of some European majors to go net-zero and reduce fossil fuel exposure in the energy transition have helped their stocks, as environmentalists and some investors see those pledges as another greenwashing, while others are not convinced yet that Big Oil could build profitable low-carbon energy portfolios without compromising shareholder returns.
Despite the fact that oil prices stayed relatively stable at $40 a barrel for more than three months and recouped some of the losses from the sell-offs in the second quarter, oil stocks have continued to suffer and reach lows not seen in decades. Related: 3 Ways To Foolproof Your Energy Portfolio
According to data compiled by Yardeni Research, the energy sector in the S&P 500 index was the worst performer, by a mile, among all sectors between January and October. The energy sector plunged by 52.5 percent year to date to the end of October, compared to a 1.2-percent gain of the S&P 500 index. The second worst-performing sector, financials, lost 22.5 percent during that period.
"The current drawdown in energy is now about 60% more than the S&P's, by far the worst of any sector in history. It exceeds the relative losses in tech after the internet bubble burst and devastation in financials following the Great Financial Crisis," Jason Goepfert, founder of Sundial Capital Research, wrote in a blog post last week. The losses in the energy sector are now the worst in any sector since 1928.
"Going back to 1928, it has been unusual to see any sector, at any point, to lose 35% more from a high than did the broader market," Goepfert said.
The Energy Select Sector SPDR Fund (XLE), whose top holdings include ExxonMobil and Chevron, lost more than 50 percent between January and October.
Shares in Diamondback and Occidental Petroleum, for example, have each lost 70 percent so far this year. Exxon's stock is down by more than 50 percent, and as of Friday's close, its share price was the lowest since early 2003.
Oil stocks in Canada haven't been spared the plunge either, with the biggest companies in the sector crashing by more than 60 percent.
In Europe, shares of majors BP, Shell, and Eni have each shed 60 percent of their value this year, while the 16 constituents from the oil and gas sector in Europe's Stoxx 600 index have collectively lost US$421 billion (364 billion euro) of their market capitalization that has dropped by 53 percent, a Financial Times analysis of data from Bloomberg showed last week.
The oil price crash and the uncertainty about future oil demand, with faltering recovery from the coronavirus crisis and the ongoing energy transition, have taken their toll on the energy sector performance this year.
The majors who unveiled strategies to be part of the solution instead of the problem in the fight against climate change, as they say, have yet to convince investors that they can deliver on their pledges. For example, BP and Shell saw their stocks crash to 25-year lows at the end of September and early October after announcing details about transforming into broad energy companies.
Some may see those multi-decade lows as a buying opportunity. But the oil market is definitely not out of the woods yet, with October the worst month since March. Moreover, pressure from investors and society will continue to weigh on fossil fuel stocks until Big Oil manages to convince them that today's oil firms deserve a place and a key role to play in the energy transition.
By Tsvetana Paraskova for Oilprice.com
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