What Explains The Poor Performance Of Oil Stocks?

It's amazing - I was so much more comfortable holding oil stocks last year - when oil was trading fifteen dollars lower and more, than I am right now. It's certainly getting a lot tougher out there in energy land, with our stocks acting - well, actually pretty badly - despite all the positive analytics we can throw at them.

So, what the heck is going on with our beloved energy stocks?

Well, surely the new-found volatility in the markets at large have something to do with it. With the latest FED indications that interest rates are headed higher (even if slowly), we know that the easiest of the easy money era is over. That's going to impact all stocks, not least our leveraged oil producers.

But it can't be just that. Interest rates shouldn't be a tremendous cash-flow killer any time soon, not with the general discipline that oil companies have shown cleaning up their balance sheets in the last three years.

And, despite the enormous recovery that the stock markets have experienced since the big volatility-spiked drops earlier this month, oil companies not only took the worst of the drops, but have been severely under-performing the rest of the market on this huge rally back.

What could be the reasons for it?

There's no doubt that earnings performances from many of the oil companies reporting 4th quarter activity of 2017 over the last few weeks haven't been stellar. Exxon-Mobil, surely the benchmark of mega-cap oil majors, was particularly awful.

But, oil companies are getting punished, it seems even if they have decent reports. Look at one of my old favorites, Cimarex (XEC).

(Click to enlarge)

Wow, that's some incredibly bad price performance in what's been a recent $55+ per barrel crude environment.

Even after a seemingly good report, Cimarex continued to drop. Their 4Q's showed a solid 19 percent growth in 2017 and they are projecting another 15 percent growth this year, all inside of current cash flow. That should to make for an enormous increase in revenues, if oil stays anywhere near $60 a barrel this year (and I believe it will). That, in turn, should make sub-$95 share prices a gift. But it's tough to recommend, as I haven't figured out what's causing all the pressure right now.

Could it be that shareholders are abandoning ship as CEO Tom Jorden expresses disdain for the idea of capital restraint and value creation that most other oil companies are now beginning to move (thankfully) towards. Could it be that shareholders are just fed up?

I'd say maybe yes - but Cimarex is hardly alone --- hardly. I could name a half dozen other independent E+P's who also see no desire to move towards 'value creation' as opposed to drilling their best land, no matter where crude is trading - and increasing production at all costs. And they're not getting nearly as mangled as Cimarex. (Yes, Pioneer Natural Resources, I'm talking about you).

What else could be at work?

Is it the continued pessimism of the EIA and IEA, expecting US oil production to near 11 million barrels a day by the end of the year, again forcing oil prices back towards $40?

I think those predictions are so far from likely as to be laughable. But who cares what I think? If the markets think that's going to happen, that could be a good reason they're abandoning oil stocks now - and also a great reason to get aggressive in their wake.

But I cannot blithely recommend beaten down energy stocks here, without having much better grip on why they're trading so miserably. I'm not sure of the reasons - yet. So, at this stage my best advice is to rest on cash, and invest sparingly in lower beta names like the Euro-majors I recommended last week. Clarity always appears at some point - you sometimes have to be patient and wait for it.

By Dan Dicker