By Michael Bellusci (Bloomberg) — In a historic Monday for crude prices, energy-exposed equities didn’t quite crater as some may have envisioned.
The price on the futures contract for West Texas crude that is due to expire Tuesday fell into negative territory — minus $37.63 a barrel. Yet the S&P 500 Energy Index fell just 3.3%, the most since last Thursday, and even posted a brief gain earlier in the session. Leading decliners Occidental Petroleum Corp. and Pioneer Natural Resources Co. posted drops in the single digits. In Canada, Toronto’s energy gauge fell 0.6%.
Traders are getting off of the May contract “at all costs,” said Patrick O’Rourke, an analyst at AltaCorp Capital. Equities might be pricing in some form of recovery, while a risk remains that the June crude contract could trade similar to May’s, O’Rourke said.
“The market is being overly optimistic about the future contracts beyond the current month, thus holding the equities up,” said Rafi Tahmazian, a senior portfolio manager at Canoe Financial.
After a lackluster OPEC meeting earlier this month, Tahmazian now sees the free market at play to re-balance oil prices, while higher-cost and debt-ridden producers will be left in the weeds. He sees an underlying benefit for Canadian energy stocks, while U.S. firms continue to suffer.
“We think that it will play well for Canadian equities as our dry gas producers will benefit from associated gas shut-ins, and the vast majority of our oil production is lower decline so it would not be categorized as high cost,” he added.
Shares of Canadian natural gas producers Tourmaline Oil Corp. and ARC Resources Ltd. were among the leaders Monday, both up over 5%. U.S. gas drillers also rallied with JPMorgan seeing “more legs” in the trade.
Tourmaline is O’Rourke’s top pick. There’s been strength in the natural gas curve resulting from the decline in oil, he said, to the benefit of gas companies. The enthusiasm comes with some caution, however, as “there’s a lot of gas throughout North America.”
Meanwhile, in addition to oil’s oversupply and lack of global crude demand, some investors are attempting to call a bottom. “The end to the oil bloodbath is in sight,” said Eric Nuttall, a portfolio manager at Ninepoint Partners in Toronto.
“At some point energy stocks will begin to diverge from weak short-term pricing as the market starts to look beyond Covid-19 to a significantly tighter market,” he added.
Cost-slashing measures across the sector continue, with Halliburton Co. setting full-year 2020 capital outlays at $800 million, 33% below previous guidance and the first sub-$1 billion budget since the depths of the last crash in 2016.
Meanwhile, tanker stocks including Teekay Corp. and Nordic American Tankers Ltd. advanced over 19% Monday, as Benchmark Middle East-China tanker rates increased 5.2%, according to Baltic Exchange data.
And as exploration & production earnings near, first-quarter results are going to be hit by lower price realizations, profitability and cash flow due to the slide in benchmarks and weaker demand related to Covid-19, according to Bloomberg Intelligence.© 2019 Bloomberg L.P