Speculators raise bets against US oil and gas companies

Bruised by plunging commodity prices and oversupply across the industry, US oil and gas companies have come into the sights of market speculators, who have placed huge bets against equity valuations in the sector.

Short sellers have added more than $460m to their short-interest positions since the start of February, according to data from S3 Partners, a research company, the largest move of this kind in the sector since June 2019, when oil prices tumbled into a bear market.

In addition, two exchange-traded funds considered proxies for US energy, XOP and OIH, have drawn particular attention from funds seeking to profit from the sector’s deepening slump. Short interest in both now amounts to around 40 per cent of their shares, the data show.

Investor disenchantment with US oil and gas companies is not new — but it has suddenly accelerated. The sector’s high debt burden, patchy record of paying back investors, and the inability of some producers to spend within cash flow has consistently dragged on equity valuations.

The S&P index of energy stocks is down 25 per cent so far in 2020, compared with a 7.5 per cent drop for the S&P 500, and is barely positive over the past 10 years. Bank of America calculated that the sector was now underperforming the broader market by the biggest margin in almost 80 years.

Short sellers think worse is imminent for energy equities. Some spent recent days drawing up lists of especially vulnerable companies, reflecting a sudden negative shift in mood about the coronavirus among hedge funds in the US, according to conversations with people close to these moves.

“Short sellers have put a lot more cash into the pot by shorting another $462m worth of energy stocks, anticipating further price weakness in the short term,” said Ihor Dusaniwsky, head of predictive analysis at S3.

Among shale companies targeted for shorting in recent weeks have been Range Resources and Southwestern Energy, according to S3 data, both large producers of natural gas left exposed to the plummeting commodity price.

Big short positions have also been opened up in the shares of Callon Petroleum and Matador Resources, two companies operating in the prolific Permian shale oil play.

WTI crude oil, the US benchmark, fell beneath $45 a barrel on Friday to a four-year low and is down more than 27 per cent since the start of the year. US natural gas prices are at historic lows beneath $1.70 per million British thermal units.

But the sliding commodity price is not the sector’s only problem. The global market sell-off triggered by fears of economic dislocation owing to the coronavirus outbreak has come during a period of oversupply in energy markets.

“It’s structural,” said Yasser Elguindi, market strategist at Energy Aspects, a consultancy. “Energy equities have underperformed relative to the commodity, relative to the S&P. Investors are saying ‘no mas’. They’ve lost faith in management.”

The bets against XOP, an ETF that tracks oil and gas explorers and producers, now amount to more than $1bn — or almost half its float — with the number of shares shorted up 9 per cent in the past month and 2 per cent this week, according to S3.

Short interest in OIH, an ETF that tracks oilfield services companies, rose 9 per cent over the past week and amounts to $233m, or almost 40 per cent of its shares.

The move to open bigger short positions creates the opportunity for a squeeze, if valuations show any signs of creeping higher. But a short-covering rally — or any kind of sector recovery — will need a stabilisation of the coronavirus outbreak or a halt to the broader market sell-off, said Mr Dusaniwsky.

“The price of crude is going to wag the tail of the short sellers in the market,” he said.

Source:Financial Times