XNG/XOI/OIH Performance – A Repeat of Last Year?
Posted by zmann on September 30, 2006
Ya know, FWIW, last year things looked great for the XNG, XOI, and OIH during the third quarter (after all, winter was on its way and Katrina had driven prices through the roof) and they both rallied strongly into Sept 30. The XNG,XOI, and OIH then proceeded to fall 11% , 15%, and –% respectively by Oct 20, because the supply/demand fundmentals were deteriorating.
Of course, after this brief albeit painful correcton, each of these indexes went on to score new record highs and each of them remain up over the last 12 months. (XNG up 11%, XOI up 17%, and OIH up 20%), which is relatively good perfomance compared to the roughly 13% performance cranked out by the Dow and S&P500 since last October.
Now the XOI and OIH being up I can understand. Oil’s up and that good for the XOI and if one thing is clear from reading way too many E&P company quarterly reports it’s that service costs have risen – a lot. More on how much later but for now just trust me – the service guys have made (are making right now) a killing. This won’t last and that why I’ve got puts on HAL and PTEN. So 2 things happen when service costs rise: 1) one it makes the service guys rich – done and, 2) it raises the economic threshold of both future prospects and current plays. Combine this with falling commodity prices and E&P magins begin to slide. Yes, the E&Ps have hedged but those thresholds aren’t falling and as the quarters tick by, the hedges roll off and are renewed- at lower prices.
That brings me back to those E&Ps in the XNG. They’re up since last year. Natural gas has fallen from $12 last Oxctober to the $5s. It’s what they sell. Their orgainic growth on average is mid single digits so a 55% decline in the price of natural gas (their primary product) is offset by some piddling growth, some near term hedges and higher oil giving them an 11% rise ttm. I don’t think so.