Unremarkable. April 2023 saw the S&P500 gain +1.6%, while energy indices were mixed. Diversified Energy (S&P 1500 Energy, S15ENRS) outperformed, rising +2.9%, with subsector performance as follows - Midstream +1.7% (AMZ), Upstream/E&P -0.4% (XOP), and Oilfield Services -1.1% (OIH). Clean energy dropped -5.4% (ICLN). Crude oil gained a modest +1.5% (~$76.80/bbl) while natural gas volatility continued, ending +8.8% (~$2.40/mcf).(1)
The biggest energy-specific items in April (Exxon/Pioneer Resources combination rumor and OPEC’s surprise 2mmbopd production cut) were both tackled in our March writeup. The only update on those fronts was the late April re-retirement announcement by Pioneer CEO Scott Sheffield. Would Sheffield walk if an Exxon takeout were imminent? Unlikely.
Looking across the market/economy, nervousness abounds as banking dominoes continue to fall with First Republic distress-purchased by JPMorgan and PacWest Bancorp and Western Alliance both seeing 50%+ intraday stock plunges despite indicating deposit trends have been OK. Additionally, tack on another +25bps from the Federal Reserve and politicians playing chicken with the debt limit (and therefore the underlying sanctity of the full faith and credit of the US government).
These macro concerns have weighed heavily on oil prices. After increasing to ~$83.30/bbl by April 12th on the enthusiasm of OPEC cuts, the crude rally failed and subsequently broke back into the $60’s in early May. There were no meaningful fundamental supply-side problems that emerged in this time frame, which means we have to chalk the weakness up to Mr. Market. Mr. Market is the toughest, most opaque, unpredictable, conviction-testing entity one can imagine. In the face of uncertainty, we fall back to our long-held belief that oil supply is restrained and any demand problems will be moderate, not severe. Thus, we get incrementally bullish when oil trades notably below our $80/bbl WTI 5-year fair value level.
We’re more comfortable with oil markets than with stock markets. Q1 earnings season brought good results from mega cap technology stocks and a decent wall-of-worry rally. YTD at the end of April, the S&P500 is +9.2%, while the Nasdaq Composite is +17.1%. This seems almost too good to be true given rising rates, tightening credit and banking problems.
On the energy front, Q1 earnings brought continued capital discipline, cash returns to shareholders, stock repurchases and commitments for “more of the same”. Certainly welcome, but not necessarily incrementally better than expected. Oilfield service players (particularly US land driller Helmerich & Payne) noted slowing trends in US drilling activity. This is not a surprise given the anecdotes we’ve been seeing/discussing for the past 6 months.
Net, net…we love the absolute level of cash generation and returns focus we see in the energy patch. We don’t love the near-term energy sector momentum (stalled) and we don’t love the overall market dynamic. So, we are content “being involved”, trading around core energy long positions, buying weakness when it emerges and waiting for multiple external variables to resolve.
Please remember the PEP organization is standing by to help – whether it be investment exposure, capital needs, energy market intelligence or help with a specific problem. As always, we appreciate your interest and welcome your questions.