Sustainable Investing

Kirk Spano

"World's Next Great Investing Columnist" --MarketWatch

350.org And Norway Are Beating Down Oil And Gas Stocks – For Now

A couple of months ago, I discussed how the biggest developing trends in the economy were tied to demographics, technology and climate change. More recently, particularly with subscribers, I have also discussed the acceleration of the fossil fuel divestment movement due to the climate change thesis of many fiduciaries.

What we have seen for the last few quarters is an acceleration of the fossil fuel divestiture movement. At the end of last year we saw multiple institutions selling off oil and gas stocks in a sort of window dressing.

Do not mistake that as a one-off.  The institutions that have committed to divesting, generally over a period of years, manage nearly $8 trillion. Presuming they were light on fossil fuel stocks to begin with, even a 1% asset allocation weighting means they will be selling $80 billion worth (and probably a bit more) of fossil fuel stocks in coming years.

The market cap of the energy sector of the S&P 500 is about $1.711 trillion.   

The new selling in recent weeks has not come from a new avalanche of institutions jumping on board the divestment train though. One gigantic institution appears to be at the heart of the recent sell-off.

Oil and gas stocks are being sold en masse by Norway’s pension fund (formerly called “the oil fund) as it unwinds positions in $7.5 billion worth of fossil fuel stocks. The sell targets comprise 134 companies, including dozens of U.S. stocks.

Norway’s Oil & Gas Stock Selling

In March, Norway made the decision to start selling its oil and gas holdings except for the Majors and a handful of certain other companies, including Norwegian Equinor (EQNR), formerly Statoil. In April, those sales began and appear to be hitting a crescendo of selling now.

Of the top 20 holdings in the SPDR Oil & Gas E&P ETF (XOP), every single one has been targeted for divestment by Norway, except Hess. That’s 19 or 20 of the top holdings have been getting sold by Norway’s fund. That’s monumental.

In the chart that follows, I use a simple on-balance money flow analysis to approximate the rough sales or purchasing of company stock in April, roughly since Norway started selling. All the sales are not Norway though. Some of the selling is momentum traders and algos piling on.

Symbol

Company Name

ETF % Weight

Approximate April Dollar Flows

APC

Anadarko Petroleum Corp

3.24%

+$336m

PXD

Pioneer Natural Resources Co

2.37%

+$14m

NBL

Noble Energy Inc

2.37%

+$16m

WPX

WPX Energy Inc Class A

2.31%

+$29m

WLL

Whiting Petroleum Corp

2.30%

+$17m

DVN

Devon Energy Corp

2.29%

+$9.4m

OAS

Oasis Petroleum Inc

2.27%

-$54m

CLR

Continental Resources Inc

2.24%

-$1.8m

CXO

Concho Resources Inc

2.21%

+$31m

PE

Parsley Energy Inc A

2.20%

+$23m

PDCE

PDC Energy Inc

2.18%

+$9.5m

HES

Hess Corp

2.17%

-$7.9m

DK

Delek US Holdings Inc

2.15%

-$9.1m

EQT

EQT Corp

2.14%

-$12.6m

CDEV

Centennial Resource Development

2.14%

+$42m

EOG

EOG Resources Inc

2.12%

-$20m

VLO

Valero Energy Corp

2.11%

+$33m

PBF

PBF Energy Inc Class A

2.11%

-$158k

FANG

Diamondback Energy Inc

2.10%

+$4.9m

CRZO

Carrizo Oil & Gas Inc

2.10%

+$2.1m

CHK

Chesapeake Energy Corp

2.04%

-$270m

CPE

Callon Petroleum Co

2.04%

+$3.1m

MTDR

Matador Resources Co

2.03%

-$4.3m

COG

Cabot Oil & Gas Corp Class A

2.02%

+$34m

MRO

Marathon Oil Corp

2.00%

-$76m

Approximate Inflow/Outflow Subtotal

>>>>>>>>>>> 

-$187.858m ex-Anadarko…+$148.142m w/APC

I highlighted my Dirty Dozen Oil Stocks from a previous piece. Here the 3 not in the top 20 XOP holdings:

Symbol

Company Name

ETF % Weight

Approximate April Dollar Flows

COP

Conoco Phillips

1.87%

-$17m

OXY

Occidental Petroleum

1.79%

-$164m

ECA

Encana

nil

-$137m

The price change for XOP during April was -.22% or virtually even. What’s interesting to me is the pattern the month showed. There was consistent buying into the third week of the month. And then, options expired and there was a wave of selling into the last week.

So, what does that tell us? It tells me that there was a lot of excitement about the Anadarko bidding war that developed. It also tells me that there is consistent selling into strength. It probably also tells me, and this is a lesson we should have learned in December, that because more people are passively investing, that traders have more impact at the margins.

So, ex-Anadarko, there were definitely outflows from the energy sector. But, not nearly as much as might be expected given that Norway is unwinding such a big position. What gives?

Well, here’s the chart for XOP since the beginning of the year. There was a surge in energy stock buying to open the year. I attribute that to general buying after the December blow-off bottom, retirement plan contributions which are largely the fuel of the “January effect” and perceived value that was present in the energy sector.

What Is Next For Oil & Gas Stocks?

As I noted in the introduction, while the fossil fuel divestment movement is growing, it is still a pittance compared to the overall size of the sector. Norway is a one-off event that won’t be repeated because no other fund has that scale and motivation (yet on the motivation).

What we are learning right now is that the price of oil is unlikely to dive again soon. The supply and demand equation is well in hand by Saudi Arabia at this point and the U.S. shale sector has stalled its growth, because frankly, two-thirds of it is not financially healthy.

By necessity, there are going to be a lot of mergers and buyouts in the oil patch. As that oligopoly continues to develop and wildcatters disappear, the price of oil gains more traction to remain firm – until of course we are selling a lot of EVs sometime in the next decade.

Between now and the dawn of the EV Age, oil and gas companies stand to be very profitable as they control growth and focus on financial metrics. We have seen about a third of the companies in the oil patch do just that the past few quarters.

Companies across the Dirty Dozen Oil Stocks are creating shareholder value by reducing debt, paying dividends and buying back shares (the definition of shareholder yield). I believe the consolidation wave picks up pace into this year and next. I would guess that no fewer than 6 companies in XOP, and possibly a dozen, are operating under different flags by the end of next year.

That will continue to drive share prices up for M&A candidates. The companies to focus on are the ones that have assets in the Permian Basin.

I am going to spend the weekend looking at charts and putting together a buyout list that is more focused. I already discussed 8 companies in my webinar last week. You can see that here:

https://youtu.be/b39Fuoa3jzM

XOP technical_chartApril
XOP technical_chartApril
XOP technical_chart (1)
XOP technical_chart (1)
Kirk Spano covers Sustainable Investing as one of the original contributing analysts at FATRADER. Named the "Next Great Investing Columnist" at MarketWatch, Kirk has been getting the jump on secular trends for over 20 years, and now sees investing in alternative energy, smart grid, EVs, agriculture, healthcare and water as the most likely place to make outsize profits in coming decades.
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