Crude oil has rallied smartly over the last five days. As a proxy, the iPath Crude etf, OIL, is up ~11% in that period. There is a view that oil could have meaningful upside as the re-flation trade continues to play out, especially with a weakening dollar. We manifest our global macro calls in our etf portfolio, but for those who cannot play etfs, or the commodities directly, we want to highlight an important data point as it relates to the energy sector. Specifically, in a rising oil and natural gas environment the largest capitalization companies may be laggards.
We saw this in spades over the last five days. As outlined in the chart below, the etf OIL was up 10.9% and the Energy SP500 etf, XLE, was up 8.8% in this time period. Within the XLE, there was a major bifurcation between the two largest companies and the eight next largest companies.
The two largest companies in the XLE are Exxon Mobil (XOM) and Chevron (COP). Together these two companies comprise 37% of the XLE. Over the past five days, these two stocks were up 2.6% and 2.8% respectively, dramatically underperforming both oil and the XLE. The next eight largest companies comprise 28.3% and over that same period were up 11.2% on average and outperformed both the XLE and the commodities.
While the next eight largest companies are a mix of oil, natural gas, and services (Schlumberger), this is a dynamic that will likely continue. The largest oil companies, such XOM and COP, while cheap with healthy cash flows, have a very difficult time adding reserves that will enable them to grow their production at a high rate. Thus, in a rising oil environment, when scarcity of oil begins to get priced into the equities, the super capitalization companies could dramatically underperform, as they have in the last five days.
Daryl G. Jones