January 30, 2020 / 9:05 PM / 22 days ago

December bump in oil prices not enough to salvage energy earnings

NEW YORK (Reuters) - Investors hoping a late-2019 rise in oil prices will buoy energy stocks are likely to be disappointed when a raft of companies report results in coming weeks.

FILE PHOTO: Trader Michael Urkonis works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., January 28, 2020. REUTERS/Bryan R Smith

Energy stocks were among the S&P 500’s worst performers over the last decade, as concerns over an oversupply of oil hurt earnings and share prices.

December saw a brief reversal, as optimism over a U.S.-China trade deal boosted prices for WTI crude CLcv1 by 10% to over $60 a barrel. Rising oil prices helped the energy sector rise more than 6% for December, its best monthly performance since June.

Still, the sector is expected to show a 41.2% decline in earnings growth from a year earlier, according to Refinitiv data.

The relationship between energy stocks and oil prices has been weak over the last few decades: the 90-day correlation between the Select Sector Energy ETF (XLE.P) and WTI crude going back to 1999 stands at 0.49, according to DataTrek Research.

Correlation is measured from minus one to plus one: minus one implies the prices of two assets are moving in opposite directions, while a 1 shows them moving in lockstep.

“History very clearly shows this industry doesn’t really move with oil prices,” said Nicholas Colas, co-founder at DataTrek Research in New York.

Many oil companies are unlikely to fully benefit from the oil price bump because they had curtailed production, said Stewart Glickman, energy analyst at CFRA in New York.

“To the degree that they had spot exposure, yeah that will probably help, but it won’t be a huge impact,” he said.

In a sign of the sector’s challenges, oilfield service company Halliburton (HAL.N) shares are down 31.2% in the past year. The company disclosed a $2.2 billion charge when it announced earnings this month and said in its conference call that U.S. gas prices remain below breakeven levels.

ExxonMobil (XOM.N), Chevron (CVX.N) and Phillips 66 (PSX.N) are to report on Friday, with ConocoPhillips (COP.N) due next week.

Some analysts believe underperformance has made the sector attractively valued. The sector is “cheap on cash flow, cheap on dividend yield, it is cheap on book value,” said Stephen Massocca, Senior Vice President at Wedbush Securities in San Francisco.

(Graphic: 20-yr Energy sector relative to S&P vs crude, here)

For oil prices to climb much higher, there would have to be a stronger global economy or a supply shock.

“For energy to outperform, typically, you need to have a global economy that is growing at a decent rate, which is not the case,” said Scott Wren, senior global equity strategist at Wells Fargo Investment Institute in St. Louis, Missouri.

“Some of the fundamentals can look pretty good but the macro fundamentals don’t seem to be that great.”

Reporting by Chuck Mikolajczak; Editing by Ira Iosebashvili and David Gregorio

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