Energy companies' shares are losing on value despite the stable price of oil
One of the sectors that has still not recovered from the coronavirus pandemic and is also the worst performing sector is energy. The fall in the price of oil to negative values in April left a very significant mark, nevertheless, the price returned very quickly and stabilized at around $ 40 per barrel. However, American producers can’t seem to find a way to be profitable at current prices and are sinking into losses. Plus there is also palpable nervousness regarding a possible replacement of the president.
Loss of capitalization by almost 50%
In the last 3 months, WTI oil has more or less not detached from $ 40 a barrel, and apart from occasional volatility, it is kept from a larger slump by massive production cuts while oil’s growth is hindered by a slower resumption of oil demand. Over the same period, however, the shares of energy companies fell by 14% and the energy sector is doing the worst of all sectors. The two largest US energy companies, ExxonMobil and Chevron, have lost much of their capitalization. ExxonMobile by 50% and Chevron by 38%. The reason is still the relatively low price of oil, for which most investors cannot be profitable in the long run. Many companies can't seem to be able to stay above (or at) zero prices.
The total capitalization of the energy sector of the S&P 500 index has been declining by almost 50% since the beginning of the year. On the other hand, the stocks of clean energy companies are currently in the spotlight with an 80% increase from the start. Therefore, some companies will now have to go through a consolidation phase, when they either adjust their balance sheets or go bankrupt. The growth of renewable energy companies will continue. And that is what other companies will need to respond to because a long-term future for fossil fuels is being increasingly questioned.
Biden and his return to clean energy
The possibility of electing a new president, Joe Biden, is also accompanied by uncertainty. And the reason why is that Biden supports clean energy and the energy sector would probably undergo radical changes under his government. His plan is a clean energy revolution in which he wants to invest billions of dollars. He has made it clear several times that he wants to reorient the US from fossil fuels. Among other things, he plans to step up restrictions on hydraulic fracturing and ban exploration of new oil and gas deposits on federal lands and in federal waters. The energy sector would do far better under the Trump government, who is losing out in preliminary surveys.
Chart: Development of energy sector capitalization and oil prices (Source: FT.com)