No Hope for Energy Companies?
Are traditional energy stocks, oil companies a good buying target?—ask many investors. The energy sector is the most hated investment today. Far the worst in the group of the 11 main industries in the main American S&P 500 index. (See S&P 500 Sector Performance in 2020–The 11 Riders of the Cataclysm.) The Energy Select Sector SPDR Fund (XLE) fell approximately 50 percent this year, US crude oil (WTI) 33, Brent crude, 35 percent. The ETF of global energy stocks, FILL was also 45 percent lower.
But if stocks fall, that doesn’t mean they are cheap. They can be still overvalued, or their outlook may be very dark. Think about disrupted, disappeared sectors, and professions. Like vinyl record producers, steam engines, horseshoe blacksmiths, ship carpenters. The oil sector is suffering since at least 2014. Since the big fall of crude, from prices well above a hundred dollars to prices well below a hundred dollars.
Basic overproduction developed in the crude market in the last years. Followed by other bad news reducing demand. Like the growing popularity of energy-saving cars, electric vehicles, the coronavirus pandemic and restrictions, the spread of home offices. Also, natural gas prices are low in the last years, another important income source for many energy companies. Even the plane manufacturers want to be emission-free. For example, Airbus will experiment with hydrogen-based energy cells and plans to produce hydrogen-fueled aircraft from 2035.
Energy Stocks for Contrarian Investors
There is not much light at the end of the tunnel yet, although an effective vaccination can make a big difference in a few months. But that is the point. For contrarian investors, this may be a big moment. The lifetime opportunity. The time when all the bad news has been built into the prices. When everyone has sold already, or have forgotten this investment. Then it can easily be big bounces in the short run.
But not only the “dead cat bounce” style ones. In the long run, oil and natural gas may be needed for decades more to come. That means significant revenues to at least the more efficient oil producers. Crude exploration and industry investments have been lacking since 2015 for the sharp fall in prices. Even crude shortages may happen in the coming years. Some oil companies are shifting slowly to renewables. Because energy will be needed.
Coal or Tobacco?
In the very long term, however, the oil companies, which cannot restructure their activities, may end like the coal miners. The third chart shows two coal miner ETFs. The one fell 80 percent, the other 98 percent in the last 12-13 years.
But the ones capable to adapt may maintain activities profitable. For example, we see some similar survivors in the tobacco industry (like Philip Morris).