Oil prices are soaring, yet shares of some oil companies are mired in pessimism, trading at recession-era prices as wary investors steer clear of perceived risk.
Normally, oil stocks trade in lockstep with crude, rallying as traders push up the price of a barrel of oil, spiralling downward when they do the opposite. But now there is a disconnect, with the market paying about the same – and even less in some cases – for oil company stocks as they did in late 2008, when the price of the crude market crashed.
Investors paid $24.55 per share for Husky Energy Inc. on the Toronto Stock Exchange on Friday, with a barrel of oil trading at around $100 (U.S) per barrel. By comparison, Husky was worth $26.21 (Canadian) per share, after adjusting for dividends and stock splits, on Dec. 30, 2008, when oil traded around $40 (U.S.) per barrel. And Imperial Oil Ltd., with Exxon Mobil Corp. holding the majority of its shares, closed Friday at $45.39 (Canadian) per share. On the same day in 2008, after adjusting for dividends and stock splits, it closed at $39.89.
These oil companies, and others like them, have not suffered massive blows or dramatically altered their businesses. Instead, they are victims of cautious investors, stung by the downturn at the end of the last decade and nervous about future prospects. At the same time, more tangible factors, such as costs creeping higher in the oil patch, are having an effect.
"People are questioning the strength in oil prices," said Kris Zack, an analyst at Raymond James in Calgary. Unlike gold and silver, oil prices did not take a breather this year, he noted, which prompted some market players to question why. "People are [saying]: 'Why is oil staying where it is?' People don't understand it. They are not willing to bet on it."
Europe's financial shakiness is another factor, said Marcel Coutu, chief executive officer at Canadian Oil Sands Ltd. If the global economy stabilizes, he said in a recent interview, oil equities will do the same. But until Europe is healthy, he believes investors will stay away.
"I would say, watch the European thermometer on this one, because day by day, that is probably the biggest monetary factor playing in investors' minds," Mr. Coutu said. "People want to have their money in a safe place. And there are very few safe places."
While the energy industry is usually driven by commodity prices, other industries are buoyed by credit confidence and investor exuberance – all factors in short supply in the markets right now. Investors are shying away from large swaths of equities, just not the energy sector, executives argue.
"That's what we're witnessing today: Extreme prudence by all players," Mr. Coutu said.
Brian Ferguson, Cenovus Energy Inc.'s CEO, echoes Mr. Coutu's take. "[Investors] are working to reduce risk and reduce volatility in their own portfolios," he told reporters after the company's investor day on Dec. 2. "That's causing a much more conservative approach to the way that money is professionally managed today."
Michael Dunn, an analyst at FirstEnergy Capital Corp., believes oil stock prices are languishing for two reasons: Some in the market may believe the price of oil cannot be sustained, while others believe the cost of capital for energy companies has gone up. Either factor could push investors to discount oil stocks.
Further, some oil companies are playing it safe in light of global woes, which can curb growth. And without growth, investors grow cold. Vermilion Energy Inc., for example, plans to spend $375-million in 2012 in Canada, the Netherlands, France and Australia. Mr. Zack said the company could expand more rapidly than planned in Canada's Cardium oilfield, but is instead inching forward carefully.
"With the volatility of commodity prices in recent months stemming from continued uncertainty regarding the fiscal stability of many regions, and the significant level of Vermilion's fixed capital commitments in 2012, we have elected to take a measured approach to spending for 2012," Lorenzo Donadeo, Vermilion's CEO said in a statement on Dec. 21.