Energy Stocks Aren't All Telling the Same Story

Monday was a problematic day on Wall Street, as key indexes like the Dow Jones Industrial Average (^DJI -0.98%), S&P 500 (^GSPC -0.46%), and Nasdaq Composite (^IXIC -0.64%) fell sharply. Oil prices climbed briefly to levels not seen in more than a decade, and volatility prompted by geopolitics seems likely to continue for some time to come.

Data source: Yahoo! Finance.

Stocks in the energy sector kept outperforming their counterparts in other industries. However, the gains are starting to slow even as prices of underlying commodities keep rising, and that seems to signal increasing skepticism among shareholders that the gains in the energy markets are actually sustainable.

In the bullish energy camp

On one side of the coin, shares of key players in the oil and gas services industry moved higher on Monday. Leading the way was industry giant Schlumberger (SLB 0.67%), with an 8% gain. Halliburton (HAL) climbed 6%, while the smaller but more volatile NOV (NOV 0.64%) bounced 16% higher.

Oil-field services providers are generally aligned to trends in the price of oil, but their stocks don't necessarily react as quickly as those of exploration and production (E&P) companies. By contrast, for E&P players, production is often fixed in the short run, and so the amount of profit they make is directly tied to the prices they're able to get when they sell. The higher that crude moves upward, the more money they earn.

For oil-field services companies, it takes a while for strength in oil markets to flow through to business expansion. If E&P companies think a price spike is purely temporary, they won't boost production in response, and so companies like Schlumberger and Halliburton won't necessarily sell any more of the pipe, drill bits, and other goods and services that go into drilling and energy production.

Recent gains for Schlumberger and Halliburton show that shareholders have at least some confidence that oil will remain at elevated levels. The outstanding question, though, is the extent to which global producers will boost drilling activity. More drilling will mean more revenue for these oil-field services companies, and it'll take months for any such moves to show up in financials.

Image source: Getty Images.

More uncertainty in natural gas

Meanwhile, moves in natural gas stocks  were more measured. Southwestern Energy (SWN 0.79%) was up 3%, but Range Resources (RRC -0.32%) saw gains of less than 1%.

The big problem with natural gas is that it's much harder to transport across long distances than crude oil. Cheniere Energy (LNG 1.23%) reported today that its capacity to transport liquefied natural gas (LNG) from its Corpus Christi, Texas, LNG terminal, which is currently undergoing planned expansion, is already sold out 20 years or more into the future. Cheniere is the largest exporter of LNG from the U.S., but the capacity is still far below what Europe would need in order to entirely replace its reliance on Russian natural gas. That's what has prompted the company to expand its Corpus Christi terminal, signing a deal with energy engineering specialist Bechtel earlier Monday.

As a result, major price disparities exist. The same amount of natural gas that costs around $5 in the U.S., where gas is still plentiful, briefly moved above $100 in Europe on Monday. With strong demand in Europe for natural gas for heating and electrical generation, those huge differences could remain in place for the duration of the war between Russia and Ukraine. Yet that won't necessarily be of use to gas-rich E&P companies in the U.S. and elsewhere.

Many investors assume that all companies in a sector will trade in lockstep with one another. That's not the case in energy, and investors have to watch closely to see which companies will do best and which could lag behind even under bullish industry conditions.