Oil & Gas Equities - 3 key insights

We are in the final stretch of summer here and I have some great pieces of content lined up for after the Labor Day weekend.

In the interim, I finally updated all the files that make up my Crude Chronicles Energy Index (referred to as the CCEI) and this post will tell you the 3 things that jumped out to me since the last update.

In this post, I will show you how

1. Oil and gas earnings relative to the S&P are now contracting, but this tends to happen at this point in the cycle.

2. Energy’s excess earnings yield over the S&P 500 is contracting as well but again, there is a precedence for this as well.

3. A very interesting development may be occurring within the oilfield service names which is also an indicator of the “risk on” trade in energy that I have pointed out in the past.

For those of you unfamiliar with the CCEI here is the background on it.

There is no oil & gas equity index that goes back before the early 1990s. The S&P 500 Energy Index, the XLE 2.20%↑ , the XOP 2.05%↑ , and the $OSX all go back to the early 1990s.

Fama/French data has some portfolio data for petroleum equities (HERE) but when I reached out to them to ask what companies are included I couldn’t get a good answer.

So 2.5 years ago I decided to build my own index.

I downloaded price data where I could, gathered the share counts, and adjusted for splits.

After that, I gathered a list of +100 oil & gas companies and then sifted through old newspapers to collect month-end pricing.

For example here are some Standard Oil descendant quotes in 1943.

One thing that saved me a lot of time is that after Standard Oil's breakup, most of the major publications grouped all the descendants together in one section.

Check out those bid-ask spreads back in the day. I would love to make a quick $6 flipping some Standard of NJ in 1912.

Anyways, if you want more on the background of the CCEI, check the appendix to this post.

Let’s begin.

Oil and gas earnings relative to the S&P are now contracting, but this tends to happen at this point in the cycle.

The chart below takes CCEI earnings divided by the S&P 500 earnings (blue line) and the CCEI index divided by the S&P 500 index (orange line).

Clearly, energy’s relative earnings power peaked in 1Q23 and is now falling vs. the market.