Conflicted Energy Stocks: Mr. Market Versus Crude Prices

Includes: CVX, HAL, OXY, SLB, USO, XOM
by: Bio Insights

I haven't looked at the energy sector in a month, but was lucky enough to call, and warn investors about, a bearish correction in crude oil (which ended up being 7.5% according to NYMEX prices). The $96/bbl we saw a month ago was largely based on supply disruptions from Iran, which is due to the by sanctions by Western nations. Recent figures have Iran's oil exports at least 30% lower than they were.

Interesting to note is that Iran's currency, the rial, is also getting crushed against the U.S. dollar. The same article notes that the rial/dollar exchange rate have moved up over 250% in the last two years. In the world of forex, a 250% move in two years is enormous.

To argue against $96/bbl, the article mentioned the impact that world leaders (including Obama) would have on crude prices with reactionary withdrawals from strategic oil reserves. Heck, it also makes sense in terms of politics. Incumbent President Obama would not want any chance of high gas prices during an election, would he? Other factors, from both the demand-side and the supply-side, helped the oil bears.

I pointed to very large reserves of commercial crude oil of roughly 360 Mbbl, which doesn't include our strategic reserves (which are absolutely huge, at about 700 Mbbl). Total supply is at the upper extremity of the 5-year range, which implies that we are actually oversupplied with oil.

Adding to the notion that the supply-side is bearish for oil are the production figures we're seeing in the United States - especially in the Bakken region. North Dakota's production, in particular, is exploding. Texas is also seeing improved rates of production, which is doing more than enough to offset weakness we're seeing in Alaska's production.

The demand-side of the equation was another big theme that I used to argue for crude oil bears too. That argument was based on the weakness in the labor market, which isn't fully captured due to the imperfect way that the BLS calculates the headline unemployment number.

September 2012 unemployment came in at 7.8% (a big drop expected 8.2%), but the alternative measure of unemployment known as U-6 came in at 14.7% - the same as August. U-6, as described last time, represents broadest measure of unemployment taken by the BLS and accounts for discouraged workers and those who would like to work more.

There is also no signs of improvement in Europe, which further justifies the weakness we saw in crude oil price. However, since crude has moved as low as ~$89/bbl, have we seen enough to warrant a correction? Are energy stocks buyable at this point?

It's hard to say right now. The correlation between energy companies and crude oil price has driven some tickers into the red, while others have been unaffected.

Take the two really big names - Exxon-Mobil (XOM) and Chevron (CVX). They both closed on Friday trading just under their recently made 52-week highs on normal volume. Since my article (from September 10), crude declined about 7.5%. XOM and CVX rallied 3%, and actually outperformed the S&P 500 (which rallied 1.6%).

In stark contrast, you see Occidental Petroleum (OXY) which saw very weak trading - much like crude. Since the article, OXY dropped 2.5%. Oil service companies Schlumberger (SLB) and Halliburton (HAL) were very similar - dropping 2.3% and 2.4% respectively.

While larger integrated oil companies like Exxon and Chevron have refining operations that can enjoy drops in crude oil prices, they are still making their real money from upstream (production) operations. I think that this "performance discrepancy" was also caused by a large inflow of capital into the large-cap dividend stocks.

As described here, the low yields in the bond market relative to the stock market have recently seen attention from financial markets. The market has moved to a 5-year high, and dividend stocks seem to be a key driver. They offer something that growth stocks usually can't in a slow-growth environment.

This implies that investors that want to bet on the long or short side of crude oil should ignore the big names, and opt for oil funds (USO), or stocks that are accounting for movements in crude. In my book, OXY remains attractive and also offers its often-neglected yield of 2.5%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.