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Energy Shares Set for Worst Month Since 2015

27 Aug 2017 3:00 pm
By Michael Wursthorn 

Shares of energy companies are on track for their biggest monthly decline since the end of 2015, showing that stabilizing earnings aren't enough to attract investors.

Energy companies in the S&P 500 are off 17% so far this year, making it the index's worst-performing sector. August has been particularly painful, with energy shares shedding 5.7% through Friday.

The sector has given back nearly all the gains it made last year, when it rose 24% as oil prices rebounded from multiyear lows. The rally in energy companies reflected expectations that oil would continue to rise, bolstered by an agreement by the Organization of the Petroleum Exporting Countries and other major producers to curb output.

But such shares lost much of their appeal this year when oil prices started to fall again, even as earnings have generally improved off a low base. U.S. crude prices are down 11% this year and are languishing below $50 a barrel.

About $2.7 billion has flowed out of energy-focused stock funds for the year through July, according to data from Morningstar, after roughly $5.8 billion flowed in last year.

Analysts and investors pointed to quarterly reports from companies including Pioneer Natural Resources Co. as key contributors to the sector's sagging stock prices this month.

Some companies talked about not hitting production levels, which "spooked a lot of investors," said Terry Simpson, a multiasset investment strategist at BlackRock.

Pioneer cut its production-growth guidance after running into drilling problems that caused delays. Shares of Pioneer fell 11% Aug. 2, even though it reported a higher profit that beat analysts' expectations. Pioneer is down 28% for the year, with most of that decline coming in August.

Pioneer President Timothy Dove attributed the production issues to "train-wreck wells" that have caused "all kinds of problems," when he discussed earnings results with analysts. Pioneer said it now takes more time to drill those wells, and it has increased costs, too.

"Driving down costs continues to be a primary focus for us," a Pioneer spokesman said.

Chesapeake Energy Corp. exceeded analysts' expectations on quarterly profit and revenue earlier this month, but its production increase fell short. Chesapeake shares have tumbled 24% in August.

Whiting Petroleum Corp. said it expects production to increase later this year after reporting a drop in second-quarter production, which contributed to its eighth consecutive quarterly loss. Whiting, which isn't in the S&P 500, has shed 63% so far this year.

Analysts said such woes dragged down shares of other companies -- especially those who, like Pioneer, operate in the Permian Basin of West Texas and New Mexico. Concho Resources, which drills in the Permian, fell more than 8% the day after it reported better-than-expected profit and a higher output forecast. Shares are off 17% for the year.

"These companies attracted fund flows because of production growth," said David Deckelbaum, an energy analyst with KeyBanc Capital Markets. "Now they're in this Catch 22 situation where investors also don't want companies increasing supply dramatically" because of a global glut that has been pressuring prices.

After having a low exposure to the energy sector for several years, Invesco Ltd. has been building up its position over the past 18 months, said Brian Jurkash, a portfolio manager there.

Mr. Jurkash said more companies are embracing spending cuts as a way of coping with lower oil prices and higher costs tied to well drilling, contributing to the firm's decision to buy more shares of energy companies. Anadarko Petroleum and ConocoPhillips, for example, said they recently shaved a combined $500 million from their budgets.

"These guys don't need to be increasing rigs, drilling more wells and spending more money when they're not generating cash flow," Mr. Jurkash said.

John Vail, chief global strategist at Nikko Asset Management, said with depressed oil prices, the rosy growth prospects priced into energy shares may not pan out.

"Overall, our team does not think energy equities look cheap at all," he said.

Alison Sider contributed to this article.

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com

(END) Dow Jones Newswires

August 27, 2017 11:00 ET (15:00 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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