Investing in Oil & Gas - the bear market antidote?
And so the bear rolls on. At times like this it can seem that every stock in your portfolio is getting hammered, especially if you skew your portfolio towards sectors & styles that become out of favour. But there's rarely a bear market everywhere all the time.
As Ed Shing noted last week, the energy sector is a strong point in a weak tape. Last week I showed just how weak the tape really is. The average FTSE All Share stock had fallen by more than 23% in the last year (now more than 27%). I thought this week I could investigate just how strong the oil & gas industry group has been, and what the ramifications are for the future.
Finding Oil & Gas Shares
We host a hierarchy of ten "Sectors", each of which contains several "Industry Groups". Energy is the broader Sector, which has subsidiary Industry Groups including Oil & Gas, Renewables, Uranium, Coal and so on. There's two ways to access the Oil & Gas Industry Group stocks on the site:
- Firstly, you can use the Browse > Sectors pages to filter down to the Energy > Oil and Gas group.
- Secondly, you can set up an Oil & Gas stock screen very easily. Create a new screen and search for "Industry Group" as a rule type. Then select Oil & Gas.
The benefit of doing the latter approach is that you can add other filters, for P/E ratios, Yields and so on.
Oil & Gas vs FTSE All Share
In my experience, you should never take 'sector' charts provided by most sites & services at face value. They are invariably market cap weighted (read last week's post for issues with that) and they really do little to help orient the typical active private investor - who is more interested in what's going on in the market as a whole not just a few megacaps.
What I've done is run a few screens for variations of the Oil & Gas sector, then add them into a "Folio" - which generates a simulation chart of the last 12 months of performance history for the list. I've then compared the performance from this chart against the equal weighted FTSE All Share into the chart below.
The average Oil & Gas stock has risen by 13.2% in the last 12 months versus -27.3% for the average FTSE all Share stock. That's a 40.5% outperformance ! The chart below shows the performance of the Oil & Gas sector minus the performance of the FTSE All Share over this 1 year lookback. It's a consistent picture.
Profitable vs Unprofitable?
My curiosity took me further this morning. I wondered whether the market had been bidding up for profitable oil stocks. So I split the list of 77 oil & gas stocks into profitable (33) and unprofitable (44) and compared the performance.
As you can see the profitable oil & gas stocks have outperformed the unprofitable stocks. It's worth noting also that the unprofitable list includes Borders & Southern Petroleum which has risen by 470% in the last year - without this the difference would be far larger.
Thoughts
We live in a very climate conscious age, and investors have starved the fossil fuel economy of capital for the best part of a decade. It's been a noble trade, but one that denies reality. It could take decades for the economy to wean itself off fossil fuels completely - and this needs prudently managed. Depending on one's point of view, there's been a structural misallocation of capital across the energy sector. This is reinforced by the capital raising activities of fund management groups, many of whom have promoted themselves under an ESG (environmental, social, governance) banner for the last decade. Private investors on investing platforms are often nudged into ESG funds in order to 'invest for good'. Who would want to 'invest for bad'? They've hoovered up capital that certainly hasn't been invested in oil & gas stocks - the average P/E ratio of uk, profitable Oil & Gas stocks is 9.2.
At the moment, unconstrained active capital is trying to redress the balance. They are making long term capital investments into the oil & gas sector. But these investments could take 5 years+ to pay off while in the interim the consumer will continue to pay higher prices. Meanwhile there's not much active capital around as the passive & ESG investing juggernauts dominate fund flows. This could all take time to unwind. The "deep value" energy trade looks good for some time to come. Investing in profitable, or near profitable oil & gas stocks may continue to pay off - as long as your ethics can cope.
About Edward Croft
Co-founder and CEO here at Stockopedia.com. I was a wealth manager, then full-time private investor before setting up Stockopedia. I believe passionately in the power of data-driven investing to improve investment results. Oddly obsessed with the StockRanks.
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American energy companies more highly rated than U.K. ones. Maybe relects more liquid, less chance of increased windfall taxes and aren't reducing reliance on oil and gas production to go green. Might be risk of recession there next year though and dollar strength something of a negative to buy at moment.
Thank you Ed. Completely agree with the thought and sentiment as O&G has kept my portfolio above the water line. UK is in a pickle and spends £80M PA on the defense of the Falkland isles, a British Overseas Territory which has proven oil and gas reserves. Russia is now out of the game for my lifetime regardless Putin's/Ukraine's outcome. With Truss wanting energy security and going for growth, where does the UK go for energy security? The perfect solution for Truss is to offset the defense budget and enable growth. I hold £BOR (gas condensate discovered) Rockhopper Exploration (LON:RKH) (1.7 Billion barrels in place) Argos Resources (LON:ARG) (to be drilled). The region has never looked more attractive.
if we are headed to/in recession...then the time to own energy stocks may have passed (albeit long run and as Ed has covered above, the fundamentals point to oil prices staying higher for an extended period of time until the world can wean itself off given the supply side issues).
If you look back to 2007/08, the stock market peaked in the Oct of 2007 - after wobbling in the summer. Oil prices then peaked in July 2008 and declined significantly thereafter as the recession took hold (Brent crude dropping from a peak of $147 a barrel in Jul 2008 to a low of $36 in Dec 2008). So far in this cycle, markets peaked in Jan (FTSE100 was Feb) and if we exclude the spike in March, oil seems to have started reverse in June (look on a monthly chart). Now I'm not saying it won't be different this time (no bear market is ever the same) but looking at history and the run of market cycles (see graphics below)...we may be too late to benefit much from oilers
Wentworth Resources (LON:WEN) has been posted about before but is one of the larger holdings in my portfolio at 7%. Dividend around 9% now, growing, with fixed (and inflation linked) pricing with the Tanzanian government. It's a shame the Rivuma deal did not come off as that would have diversified the asset base but I find it one of the easiest holds / add in my folio. It should re-rate upward at some point - has been range bound in the low 20s - but I have topped up when it has dipped.
Thanks. Blindingly obvious a long time ago.
Always need ED-ucation on how to use the site - thanks.
There is enough gas under the Netherlands wet lands to support the removal of Russian gas apparently but shut down due to green lobby. What other assets we do not know about but not communicated due to politics.
Distribution network (pipes) is the weak spot and now a national security/defence issue.
Put into Ashtead Technology Holdings (LON:AT.) Ashfield Tech Holdings as have underwater kit and skill for this stuff.
I don't think fracking in the UK is an answer, we are not the USofA land mass to do this type of stuff - and why when its there in the North Sea. A harsh place 24/7 and brave companies ply their trade there to extract what the big boys gave up years ago.
Rockhopper operates in the Falklands - huge resources apparently but hard - all the easy wins have been dug up - so why die trying if your going to be taxed to punily.
The focus on the hot topics of the day is appreciated.
Not posting anymore technical voodoo charts so sorry for confusing the message.
If only I'd caught the breakout at $80. Hindsight a wonderful thing - not.
You may well be right - I’m not a stock picker and not a sector picker. Just someone who looks at factors and price trends and knows they persist till they don’t. When the oil trend reverses or valuations normalise, I’ll be out - till then I’m long.
Jadestone Energy - JSE brings up - Jupiter 2nd Enhanced Inc (LON:JSE) sorry.
A quick squiz on Jadestone, which is what I want from stocko, says this is afloat but has too many boats in the ocean. But made a profit which is unusual in this space so worth keeping an eye on if can figure out a ticker.
Yes, a pound sign infront of JSE brings up another company instead, which is the reason why I had to remove it and type out its full name.
Please stop posting charts in response to my comments Garry, i can do my own TA thanks. Also, you are showing a Heiken Ashi with Ichimoko cloud indicator, not something worth showing here without some explanation imo.
This is also not the correct ticker.... If you DYOR you will see that Cheniere is split between 2 listings, $LNG & $CQP. Both are effectively the same company but $LNG being the obvious play has exploded as your chart shows, CQP however has a steady uptrend and is still available at a more attractive price.
If you did want to get on $LNG, you could also look to buy the coming breakout from $177 instead.
Thank you Ed for this.
Can I ask are there any plans for Stockopedia to enable charting on a total return basis? One of the issues is that dividends which are huge in some names are simply not being captured in a chart. This would probably magnify the difference between profitable and unprofitable. Clearly this is not just an oil and gas issue and is particularly relevant in the UK where divis are more prominent.
Mike
Absolutely agree, drobs, and am thinking of topping up my Wentworth Resources (LON:WEN) holding. And why be constrained on UK O&G when there is Diversified Energy (LON:DEC) doing a great job of hoovering up old US shale gas wells with a model that means they can pay >10% post-withholding tax divs that are still growing? It's not even bad for 'ESG' as they are reducing methane leakage on acquired wells and know how to get a little more gas out of them over their extended lives, so reducing the need to drill for more. I have just topped that one up.
Energy? Just looked at my renewable (ESG) portfolio for performance review comparison with O&G. Given that physics states that energy cannot be created or destroyed I thought this a useful exercise. We are an island so let's look at tidal energy £SAE stock rank of 16 at £0.015P. Let's go to hydrogen ITM Power (LON:ITM) was £5.00 a year ago now a £1 with a stock rank of 5. Let's go to wind Greencoat UK Wind (LON:UKW) last month £1.60 now £1.40. Let's look at Solar NextEnergy Solar Fund (LON:NESF) dropped 20% this month. Fuel cells? AFC Energy (LON:AFC) from £0.60 to £0.20 in a year. Pick your horses (Mine are in the Falklands) but Ukraine has made this very different so I very much agree with Ed.
*Past performance is no indicator of future performance. Performance returns are based on hypothetical scenarios and do not represent an actual investment.
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I can't easily separate the industry group 'Oil and Gas' from the overall Energy sector in my historical data. However, looking at average Momentum Rank of the companies in the Energy sector since early 2021 suggests to me that the outperformance of the sector has been slowing since early May.