The Taylor Swift “Bad Blood” Energy Market (and Sentiment Results)

 

In previous weeks we discussed being bullish on the general market over the intermediate term, while recognizing and respecting a short term overbought condition that could either be worked off in time (grind sideways) or price (short term pullback) to shake out the late money that missed the rally from Aug/Sept lows.

Our antidote to the dilemma was to trim some of the names that had monster runs off the lows and re-allocate some to laggard sectors that either hadn't participated or were just starting to get money rotating in. Following the 25%+ run off the bottom for biotech (and much more for individual names in the space) we turned our attention to the energy sector in late October.

The theme that came to mind was Taylor Swifts song "Bad Blood" as a metaphor for portfolio managers relationship to the energy sector. Managers have pulled out just shy of $900 billion from the sector since its peak in Summer 2014. The salient lyrics are as follows:

Cause, baby, now weve got bad blood
You know it used to be mad love
So take a look what youve done
Cause, baby, now weve got bad blood, hey!
Now weve got problems
And I dont think we can solve em
You made a really deep cut
And, baby, now weve got bad blood, hey!

Remember when you tried to write me off?
Remember when you thought Id take a loss?
Dont you remember? You thought that I would need ya
Follow procedure, remember? Oh, wait, you got amnesia
It was my season for battle wounds
Battle scars, body bumped, bruised
Stabbed in the back; brimstone, fire jumping through
Still, all my life, I got money and power
And you gotta live with the bad blood now

Band-Aids dont fix bullet holes
You say sorry just for show
If you live like that, you live with ghosts
If you love like that, blood runs cold

Listen to Taylor Swifts Bad Blood here

The problem for most money managers is they missed the rebound in 2016 when WTI went down to $26/bbl and many were calling for $10/bbl. One well-known pundit exclaimed that he would never see oil above $44/bbl again in his lifetime. The sentiment was so gloomy that institutions didn't join the party until that summer when the party was already over. By the time they realized it was last call they were too liquored up to leave the party and woke up in a bath tub, alone and with a headache wondering what happened.

Fool me once, that's not fun

As you can see above, by the time most managers realized that Energy (and the leveraged sub-sector Exploration & Production) was the top performing sector for 2016 it was too late. It had moved up over 100% without them and many individual names were up more than that. So once everyone was back in the boat for 2017 the trap door opened and dropped everyone off at the next stop.

Fool me twice, shame on you

Well if that wasn't enough, the sub sector made another run up in 2018. The smart ones said, I'm not going to fall for that again until it made new highs and sucked everyone back in only to serve up a failed breakout and puke everyone out back to reality. The Exploration and Production Sector subsequently tumbled back down to the Great Financial Crisis lows of 2009 (when WTI Crude traded down to $33/bbl), and the 2016 oil patch depression levels (when WTI crude traded down to $26/bbl).

Fool me thrice, shame on me?..

So with WTI Crude trading around $58/bbl, how is the exploration sub-sector trading back down to these levels?

Taylor put it best, "Band-Aids don't fix bullet holes."

Couple this with the fact that if you take the top 30 components of the XOP today (that had comps in 2009), the earnings power has improved >32% over that time period.

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Comments

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Ayelet Wolf 6 months ago Member's comment

Good article and good song.

T.J. Hayes 6 months ago Author's comment

Thanks Ayelet. Appreciate it!

Barry Hochhauser 6 months ago Member's comment

Good analysis by the writer: You have to think about the Exploration and Production sub-sector like a portfolio of junk bonds. While 10-15% may default and go bankrupt, the remaining 85-90% will dramatically outperform. That's why it makes sense to own a basket of Exploration and Production stocks at these depression level prices of 2009 (Great Financial Crisis) and 2016 (when WTI Crude traded down to ~$26/bbl), because the 85-90% that make it can be up 100-200% over the next three to five years.

T.J. Hayes 6 months ago Author's comment

Thanks Barry