What happened
Shares of U.S. integrated energy giant ExxonMobil (XOM +0.67%) rose nearly 17% in November according to data from S&P Global Market Intelligence. That huge price gain, however, was notably less than what the shares of U.S. peer Chevron (CVX +0.66%) achieved, with a huge 25% advance. And Chevron's gain was edged out by the United Kingdom's BP (BP +0.41%), which saw a 26% rally during the month.
So what
The big energy story in November wasn't really about oil, per se, but about the expectation that the world will move beyond the global coronavirus pandemic. Upbeat trial results from three separate vaccines were released, including offerings from Pfizer and BioNTech, AstraZeneca, and Moderna. Although there are more hurdles to overcome before any of these vaccines are approved and, more importantly, widely available, the results buoyed the mood on Wall Street.
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That was particularly true for the energy sector, which is suffering through a material supply/demand imbalance. The dislocation has been driven largely by the steep drop in demand that resulted from government efforts to slow the spread of the coronavirus by effectively shutting down vast swaths of the global economy. That pushed oil prices lower earlier in the year, including a brief moment in time when key U.S. oil benchmark West Texas Intermediate fell below zero. Although there were technical reasons for that drop, it shows how bad the situation has been in the oil patch.
So when positive vaccine news started to show up investors started to get upbeat rather quickly, pushing the shares of Exxon, Chevron, and BP higher. The obvious hope is that energy demand will increase as the world moves past the coronavirus pandemic and that will, in turn, help to rebalance the supply/demand equation, which would likely mean higher prices for oil and natural gas. Although we are still a long way from that outcome, Wall Street tends to be forward-looking and has started to price material improvement into the stocks.
The interesting thing was the difference in the price gains among these three industry giants. Exxon, which saw the weakest advance, is facing the most difficult task in some ways. Indeed, it is trying to invest to grow its production and sustain its dividend in a weak oil price environment, two desires that require huge sums of money that it just doesn't have at its disposal right now. Investors are worried that it won't be able to achieve both ends, which could lead to a dividend cut. Capital spending, notably, has already been sharply curtailed and debt levels have increased notably so far in 2020.
At the other end of the spectrum is Chevron, which is also sticking largely to its oil focus. This energy company, however, has been benefiting from past spending and hasn't needed to add as much leverage to its balance sheet to sustain itself through this industry downturn. It is, basically, in better shape than many of its peers. Without the huge spending needs that Exxon is facing, an upturn in the energy sector would likely result in a quicker return of positive performance.
BP, meanwhile, has charted an entirely different path, recently announcing plans to shift toward clean energy. That decision came with a dividend cut. Higher oil prices would make its efforts to shift business models that much easier since the cash-cow energy business would produce more cash flow it can use to fund the transition.
Now what
The interesting thing about the advances here is that Exxon, Chevron, and BP all ended the month well off of their monthly highs. That suggests that there is a lot of emotion involved in the price moves, which is hardly shocking on Wall Street. However, it points out that this sector remains volatile and the path to higher oil prices is still likely to be long. Investors looking at the sector should be prepared for more ups and downs before there is a sustained improvement. As a practical matter, even after a vaccine is approved, it will likely be months or even quarters before it is widely distributed. Thus, moving past the coronavirus pandemic is still something that's in the distant future right now.
