As crude oil prices continue their sharp rise, I have to wonder if the stock market is really paying attention. Instead of fixating on every word that Mark Zuckerberg made in front of Congress, traders really should be focusing on the amount of windfall profits the oil companies will generate if crude prices remain at 4-year highs. I called the rally through $60 per barrel in December and with the front-month West Texas Intermediate crude oil futures contract sitting at $66.83 as of this writing, I believe we will see $70 U.S. oil prices by Memorial Day.
The Energy Select SPDR, (XLE) , has lagged the S&P 500 thus far in 2018 -- down 3% vs. the market's 0.3% drop -- and that has raised a buying opportunity. The composition of XLE is always a factor in its performance, as Exxon Mobil (XOM) and Chevron (CVX) combine to account for nearly 40% of the index from which that ETF derives its value. For reasons that remain mysterious to me, Exxon has been a complete dog, posting a 9% decline thus far this year and Chevron has not performed well, either. So the megacaps are dragging down the index's performance, and I'll keep adding to my clients' Exxon positions and locking in XOM"s 4.1% yield.
The smaller E&Ps are my milieu, though, because, to paraphrase Bruce Springsteen, that's where the fun is. I have been mentioning Denbury Resources (DNR) in my RM columns since last summer when the stock market was pricing in a likely bankruptcy at DNR. Didn't happen. Shares of DNR, which 6 months ago wags had dubbed "Do Not Resuscitate" have nearly tripled since hitting their all-time lows in August. I hope you bought some.
It goes both ways, however, as in January I picked Sanchez Energy (SN) As my Real Money "one stock you must own in 2018" and then the shares promptly cratered. Don't look now, though, shorts, because Sanchez shares have popped 10% this week, and still have much more room to run.
Owning shares of small E&P companies is always a dogfight, and bitter experience has taught me these stocks are not long-term buy-and-holds. Through my company's consulting business, Portfolio Guru Corporate Services, I have had a front row seat for the shale revolution. I have seen some booms and more than few busts, and I have learned that these companies are stable enterprises with ready access to capital and management teams that are universally focused on delivering value to shareholders over the long term.
In contrast, traders who "play" energy stocks are short-termist, myopic, hair-triggered goofballs whose worldviews can and do change in minutes. God love 'em, they make my job fun and exciting. So, I always try to zig when they zag, and when I see a name like Sanchez getting hammered, I buy in large quantities.
Sentiment on the E&Ps will continue to improve as the second quarter unfolds, and I'll keep my clients overweight in the group. Exxon is a buy-and-hold forever, but the smaller names are not. When WTI hits $70, I'll start taking profits in names such as DNR, Gastar (GST) , Evolution Petroleum (EPM) and SN. Until then, I'll just sit back and enjoy the show.
