The oil and gas industry, devastated by the oil price collapse in the 1980s, needed years to recover, culminating in a wave of industry mergers at the end of the 1990s.
That wave produced today’s leading oil giants. It also witnessed a decline in investor interest in energy stocks, but which stabilized in 2000. By 2003, the oil market was on the move. A decade of underinvestment restrained oil supply growth, just as China embarked on a major industrialization phase that exploded global demand growth, surprising the industry and the market. Energy stocks were hot!
Their weighting in the overall stock market climbed to a modern high, which was supported by years of $100-plus oil prices. But the handwriting was on the wall. Technology, which had crashed around 2000 with the collapse of the dotcom stocks and the Y2K fiasco began to rebound, just as investor interest in oil peaked and oil prices fell sharply during the 2008 Financial Crisis.
Although oil prices recovered — returning to the $100 a barrel level in 2011 — investor interest in the stocks did not. Oil demand growth was low, oil price volatility was high and had hurt company financial returns, and climate change was gaining support. Oil and gas was viewed as a sunset industry.
The turmoil that beset the industry starting in 2014 and lasting through last year’s pandemic destruction of oil demand and the first-ever negative WTI price did little to help investor interest in the sector. With companies swamped in debt, often filing for bankruptcy protection from creditors or forced into shotgun mergers and acquisitions, investors shunned the stocks. Oil and gas’s S&P weighting fell to barely above 2%.
Combined, the fourth quarter of last year and first quarter of this year produced a 76% return for the energy ETF, swamping the stock market’s strong performance during that period. This resulted in a small improving in investor sentiment toward energy stocks.
Trends in investor sentiment towards energy stocks was mirrored on Wall Street, as reflected in the membership of the National Association of Petroleum Investment Analysts. During the early years of the association, coinciding with the 1970s energy boom, membership was over 400 analysts. That number shrank about 10% during the 1980s oil price collapse and subsequent decade of industry recovery.
Attrition accelerated as we moved through the 2000s, resulting in membership being cut in half by 2009. It was cut in half again by 2019, falling under 100 members. While the decade of poor performance of energy stocks (2010-2020) and declining investor interest was part of the explanation for NAPIA’s membership shrinking so drastically, it was also a victim of changes in how investment research was conducted and regulatory changes altering Wall Street compensation patterns. The impact of these changes is reflected by sellside membership falling more than in half between 1998 and 2019, and now representing less than a fifth of the membership.
Negative investor sentiment will turn positive as energy stocks continue to outperform the overall market. Investors will be surprised. A key consideration is how these trends impact the industry’s next generation of technical talent.
Enrollment in petroleum engineering studies historically follows oil prices with a lag of a couple of years. From 2014 to now, enrollment’s drop has mirrored the decline experienced during the 1980s oil price collapse, helped by the growing concern about the industry’s future in a decarbonized world. The industry’s downsizing resulted in the release of thousands of employees.
Combined with an aging labor force, the energy technical talent pool is beginning to run dry, a condition that can hinder the industry’s future. That may cause higher oil prices in the future, as oil and gas demonstrate a demand resiliency well above the view that the end of Big Oil is at hand.