Beleaguered U.S. energy shares soar after attacks on Saudi facilities

  • Sep 17, 2019
  • Kitco

(Reuters) - Shares of U.S. energy companies surged on Monday, as a jump in oil prices in the wake of attacks on Saudi Arabia’s oil facilities gave new juice to a sector that has been a chronic underperformer.

Shares of Apache Corp and Marathon Oil Corp were up more than 10% each, while major energy conglomerates including Exxon Mobil Corp and Chevron Corp rose more than 2%. Some smaller stocks registered huge gains: Whiting Petroleum Corp jumped 47%, Denbury Resources Inc gained 27% and Oasis Petroleum Inc climbed 21%.

The S&P 500 energy sector index rose 3% but was off its initial highs as oil prices also pulled back, while the Energy Select Sector SPDR ETF rose more than 3%.

Benchmark Brent was last up around 13% after rising about 20%, following the drone attacks that sliced Saudi Arabia’s production in half and threatened to hamper shipments from the world’s largest crude exporter.

Bond prices of energy companies also rallied, with particularly notable gains in high-yield debt. Chesapeake Energy’s 8% January 2025 bond was up 6%, according to MarketAxess, and Whiting Petroleum’s 6.625% January 2026 bond was up 5.5%. Seven of the top 10 most traded bonds on the U.S. corporate market on Monday were energy company issues, as were seven of the top 10 most traded high-yield bonds.

Energy has been one of the worst-performing equity sectors this year and has significantly lagged during a U.S. equities bull market that has lasted more than a decade.

“Obviously we’re going to get a big boost today,” said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas. “But it’s very unclear whether or not this is going to have any long-term effect.”

Energy’s weight in the S&P 500 has fallen dramatically, recently dropping below 5% of the benchmark index, down from over 15% in mid-2008.

This year, energy shares have failed to keep pace with the rise in oil prices, despite their traditional tendency to move in the same direction.

“Energy stocks, in theory, should benefit from higher prices but the relative performance of the hydrocarbon sector has not been as tightly correlated with crude as seen in the past, possibly due to continued poor returns on equity,” Citigroup equity strategist Tobias Levkovich said in a note.

Noting that the energy sector is very “under-owned,” Matt Maley, chief market strategist for Miller Tabak, said in a note that “All of these institutional investors will have no choice but to jump on the bandwagon if this under-owned group (or any group) starts to fly higher in the second half of the year.”

GRAPHIC: Energy shrinking weight in S&P 500 - here

But rising oil prices might not be enough to propel energy shares, said Christian Ledoux, director, equity investments at CAPTRUST in San Antonio. He said that “the things that have been holding energy shares back aren’t changing,” including lack of drilling productivity and capital discipline.

“If oil were to race to $100, all those problems get swept under the rug and we don’t have any capital problems,” Ledoux said. “But unless, it goes over $70, I don’t see that happening.”

U.S. crude last traded around $62 a barrel, up over $7 on the day, while Brent was over $68 a barrel.

In a morning note to clients, JP Morgan analysts estimated the price of crude could jump between $5 and $30 a barrel in the months ahead.

“The apparent sophistication of the attack in terms of both the target and its execution should re-establish or re-emphasize a geopolitical risk premium into the price of oil,” they said.

Ledoux noted that the some of the biggest gaining stocks on Monday were companies with high costs of extracting oil.

“Their cost of drilling and cost of extraction are the highest, so they get the biggest swing from a higher commodity price,” Ledoux said.

The impact from the oil price spike spread beyond the energy sector, with shares of airline companies, which count fuel as a major cost, falling broadly. American Airlines Group Inc shares fell 5%, while United Airlines Holdings Inc dropped 2.8%.

Reporting by Lewis Krauskopf and Kate Duguid in New York and Susan Mathew, Ambar Warrick and Sruthi Shankar in Bengaluru; Editing by Patrick Graham and Paul Simao