Why are oil & gas equities suffering while crude prices are strong?

Over the past year, there has been a remarkable recovery in oil prices, with Brent up over 40% from this time a year ago (and up about 60% since the lows of June 2017). Oil and gas equities however, have not fared as well as the underlying commodity. The NASDAQ Large Cap Oil & Gas index is essentially flat from a year ago, while the small cap index has fared even worse, being down 7%.

What is driving the disconnect between oil and equities and oil prices? Clearly there is a lack of interest from the broader market. While oil prices have remained strong since the end of 2017, equity investors seem to be questioning whether the recovery is for real, or if there is a risk of prices returning to the $40 lows of last summer. Also, the benefits (higher earnings and cash flow) are just starting show up in oil company results, as organizations report their Q4 2017 earnings: While oil and gas specialists will be the first to pick up on the good news, generalist investors will be further behind.

It should also be noted that investing cycles take awhile to set in, with the largest companies in any given industry the first to get attention and benefit from an upswing. This explains large cap oil and gas’s relative outperformance compared to their small cap peers. However, once the cycle firmly sets in, it is typically the smaller companies that make the biggest moves—and generate the largest returns.

Meeting with potential investors at recent conferences, TAG Oil has noticed a definite increase in interest in the oil and gas sector compared to a year ago. While we’re impatient for results, we take this as a positive indication that the recovery in equity prices will soon follow the recovery in crude prices seen over the last nine months.