What Really Moves Energy Stocks?

Average Annual Returns May 2003 - December 2007

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Source: Bloomberg

No major imbalances of color clustering are visible. The refiners, such as Tesoro (TSO - commentary - Cramer's Take), Valero (VLO - commentary - Cramer's Take) and Frontier (FTO - commentary - Cramer's Take) occupy three of the top seven slots.

Two coal companies, Peabody Energy (BTU - commentary - Cramer's Take) and Consolidated Energy are in the top eight.

The two super majors, Chevron (CVX - commentary - Cramer's Take) and Exxon Mobil (XOM - commentary - Cramer's Take), are in the middle of the pack.

Factor Rankings

Now let's expand the analysis to regressions of each stock against three different energy market variables, West Texas Intermediate at Midland, Texas, natural gas at Henry Hub, La., and a 2-1-1 crack spread of Midland at the U.S. Gulf Coast.

The Midland location was chosen because of this year's distortions at Cushing, Okla., which I discussed in May. A 2-1-1 crack spread is the refining margin for turning two barrels of crude oil into one each of gasoline and heating oil; I last discussed the outlook for refining margins in October.

The statistically significant betas against crude oil are presented below. Now the color clusters become a little clearer: The left-hand side of the chart is dominated by the green, orange and red, for equipment and services, exploration and production and drillers, respectively.

Both refiners and integrated oil firms, blue and violet, are shifted to the right, with Chevron and ExxonMobil doing rather poorly. Think about this whenever you hear someone recommend those two as crude oil proxies.

Betas of Energy Stocks Against Crude Oil

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Source: Bloomberg

Now let's repeat the exercise for natural gas. The left side of the chart is dominated by the exploration group's orange columns. Once again, the integrated firms do poorly: Chevron is dead last in this ranking, and the beta for ExxonMobil failed the 90% statistical significance test.

You may ask yourself why the stocks of exploration firms, which presumably are involved in long-term payoff projects, would react well to short-term increases in natural gas prices. The answer is not at all clear on the face of things.

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Howard L. Simons is president of Simons Research, a strategist for Bianco Research, a trading consultant and the author of The Dynamic Option Selection System. Under no circumstances does the information in this column represent a recommendation to buy or sell securities. While Simons cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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