The S&P 500 index is up 14.2% year to date and the Nasdaq Composite has climbed 41.8% over the same timeframe, but not every industry has thrived in this difficult year. Companies in the energy sector have struggled following the collapse of oil prices in February. Though crude oil has somewhat rebounded, the average barrel is still cheaper than it has been in years. This has caused some issues that ripple through various industries and energy subsectors.
Exploration and production companies generate fewer dollars for every barrel pumped and sold, but the operating expenses and capital investment required the generate those volumes remain the same. This creates a squeeze for equipment suppliers, refiners, and transportation and pipeline companies. With profits threatened across the industry, fewer lenders are willing to provide capital, which drives the cost of capital higher for the energy sector, further eating into profits.
As a result, investors have lost interest in energy sector stocks, sending prices downward and wiping out billions in equity value. Here are some of the companies getting hit as a result.
ExxonMobil (NYSE:XOM) is the largest energy stock on U.S. exchanges, with a $179 billion market cap. Shares are down roughly 38.6% for the year, representing roughly $112 billion in equity value. The integrated oil and gas giant is struggling with the aforementioned low crude oil prices, and it even suffered removal from the Dow Jones Industrial Index after nearly 100 years on that list.
Investors will hope that sustained demand from transportation and utilities will support crude oil prices moving forward, while expanding middle classes and economic activity in emerging markets will create catalysts. Regardless, significant damage has been done this year, building upon several years of losses.
Phillips 66 (NYSE:PSX) engages in the transportation, refining, and marketing of oil products and specialty chemicals. The company has struggled to deliver profits in the current environment, with especially large losses in the refining segment.
Among other one-time issues, the refinement business is being hurt by tighter spreads between crude prices and marketed materials, leading to narrow margins and elusive profits. Phillips 66 is down about 38.9% year to date, losing nearly $20 billion in market value for shareholders. If oil prices remain low, this downstream leader will continue to experience challenges. However, the right-sizing of price spreads should eventually provide relief in the refining business, which has shown sequential improvements since the second quarter turbulence. Phillips 66 is delivering profits in all of its other business segments, so investors can be optimistic that the worst damage is behind the stock.
Kinder Morgan (NYSE:KMI) is a large energy infrastructure company that owns more than 83,000 miles of pipelines and 147 terminals. The company cited decreased overall energy demand due to the pandemic in its latest quarterly financial release, and this obviously translates to lower revenue for a company with large fixed expenses related to its physical equipment. Despite dealing with these issues, the company's adjusted profits are only down 10% year over year through three quarters, and the stock's dividend was actually raised 5% over the prior year.
While these results may seem more encouraging than those reported by other companies in the energy sector, the market has still turned on Kinder Morgan. The stock is down 29.7% year to date. At its current $32.5 billion market cap, $14.1 billion in value has been wiped out for shareholders.
Schlumberger (NYSE:SLB) is an oilfield services company that provides equipment, technology, project management, and IT services to the energy industry. Energy companies are reducing production and investing less in exploration and oilfield development, meaning the demand for Schlumberger's services are taking a major hit. The company reported a 38% decrease in revenue year over year in the third quarter, with an even larger drop in adjusted earnings. Schlumberger's management has made efforts to reduce expenses and divest underperforming business segments, but the company will continue to struggle until the sector stabilizes.
Investors have fled from Schlumberger in the equity market. The company's market cap has dropped almost $24 billion as the stock fell 43% year to date.
EOG Resources (NYSE:EOG) is an oil and gas exploration and production company that derives its vast majority of revenue from North America. Exploration and production companies have a fairly straightforward model that involves the extraction and sales of oil and gas, and they simply make less money when oil prices remain low for extended periods. Adding to the trouble, they still have to honor certain contracts, pay many of their employees, and make interest payments on loans that don't change when crude oil drops. EOG stock is down about 37.1% year to date, wiping out $18 billion in market capitalization.
Modest energy price improvements for 2021?
Most of these companies have delivered sequential improvements after large shocks earlier this year. Most forecasts call for very modest improvements in energy prices in 2021, with the continued impact of COVID-19 lingering over the global economy. Risks remain in this industry, but the steep losses of shareholder value in the energy sector this year could present an attractive entry point for investors who think crude oil will rebound moving forward.