U.S. HAS GONE BUST
The share-price boom at U.S. energy firms has gone bust, due to slumping global growth and tumbling crude prices.
Companies that drill for oil and natural gas and provide services at the wells were among the most popular investor bets earlier this year, riding the coattails of a decadelong renaissance in U.S. oil and natural-gas production.
The S&P oil-and-gas equipment-and-services subsector surged 23% in 2014 through June 20, the day U.S.-traded crude-oil futures hit their 2014 high at $107.26 a barrel. Among services firms, Nabors Industries Ltd. surged 68% in that period, Halliburton Co. rose 38% and National Oilwell Varco Inc. rose 11%.
But crude prices since then have gone into free fall, following a series of dour reports on economic growth in China, Japan and Europe. Nymex crude futures closed Wednesday at $87.31, putting them 21% below their 2013 high, crossing the 20% threshold for a bear market.
The shares of energy-related companies have followed suit, reflecting investor fears that the global economy will weaken further, quelling demand, and that low oil prices will reduce energy firms' incentive to dig and maintain costlier U.S. properties, trimming energy-services firms' revenue. The S&P services subsector has since tumbled 11.1%.
"In the near term, the impact will be lower earnings and lower cash flow from a lower commodity price," said Aaron Dunn, senior analyst at the $288 billion fund manager Eaton Vance Corp. EV -3.42% "The equities potentially have further to drop."
Lower oil prices are a boon for consumers and companies that consume large amounts of fuel, like airlines. But they are a drag on the energy sector because they mean reduced cash flow and lower margins.
Among the biggest challenges for U.S. energy companies, investors say, is that domestic oil is relatively expensive to produce, at a time when global production remains robust.
If crude falls below $85 a barrel, some firms could start to cut their capital spending, which could slow growth in production, according to Bill Herbert, an analyst at the Houston investment bank Simmons & Co. International.
"Over the next year for sure, it seems there's excess supply, and demand is soft," said Matt Peron, who oversees $85 billion in equity investments at Northern Trust. "So there's no sense stepping into the energy sector right now."
The Market Vectors Oil Services exchange-traded fund, which tracks the shares of services companies, has tumbled 16.7% since June 20. On Wednesday, the fund's shares rose 3 cents to $47.09 after earlier falling as much as 3.2%.
Since June 20, shares of Halliburton are down 14%, National Oilwell's stock is down 7% and Nabors is off 27%. Exploration firm Devon Energy Corp. is off 19% after advancing 23% for the year since then.
Some smaller firms have also been hit. Emerge Energy Services EMES -4.35% LP, which mines silica crystals used to help energy companies drill wells, on Wednesday alone lost 6.7% and has shed 9.3% since June 20.
Large global energy companies also have retreated, though in many cases their slide has been more muted given their global footprint and more diverse operations. Shares of Exxon Mobil Corp. are down 8.9% since June 20.
Some investors say they are taking advantage of the slide to buy shares on the cheap.
Eric Nuttall, who manages the $89 million Sprott Energy Fund, said he has taken advantage of the pullback to buy shares of Enerplus Corp., a producer drilling in shale fields across North America, and Whitecap Resources Inc., which pumps oil and gas out of Western Canada.
"The business models of these companies is extremely profitable at the current oil price or even lower oil prices," Mr. Nutall said.
But Paul Stocking, co-portfolio manager of the $6.1 billion Columbia Dividend Opportunity fund, said he reduced his fund's bet on energy companies during the second quarter, cutting shares of companies with exposure to North American production amid concerns about slowing demand and falling prices.
Exploration-and-production and oil-services companies "are the ones that are the most sensitive to rising or falling oil prices," Mr. Stocking said. "In the environment that we're seeing right now, those are the companies whose stock prices are under the most pressure."
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REUTERS - Brent crude futures LCOc1 were down 72 cents at $61.49 per barrel at 1020 GMT, having fallen by 1.5 percent on Tuesday, its largest one-day drop in a month. U.S. West Texas Intermediate (WTI) crude CLc1 was at $55.12 per barrel, down 58 cents.
BLOOMBERG - Prices dropped during the session as the International Energy Agency said the recent recovery in oil prices, coupled with milder-than-normal winter weather, is slowing demand growth. The worsening outlook for consumption dampened some of the enthusiasm that OPEC and its allies will extend supply curbs.
Global energy needs rise more slowly than in the past but still expand by 30% between today and 2040. This is the equivalent of adding another China and India to today’s global demand.
Product exports have grown significantly over the past several years and are expected to continue to grow as Russian refineries add capacity to produce more high-quality products.