By Michael Bellusci and Felice Maranz
Energy stocks are experiencing a massive rally, exchange stocks with commodities businesses are getting a boost and flagging banks exposed to energy loans are experiencing some relief. Cruise-ship operators and airlines, on the other hand, are struggling as fuel costs are set to rise.
“The attack should prove disruptive as opposed to catastrophic,” Citi’s Tobias Levkovich wrote in a note, as the Saudis are already able to make up 40% of the lost production, and there’s potential for strategic reserve releases.
Citi’s energy research team was considering a $5-$10 per barrel increase on a less-than-$60 base, with gasoline prices shifting 10c to 25c per gallon; that “becomes a costly nuisance, but not a disaster, unless other facilities are attacked or counterattacks occur on other countries,” Levkovich said.
He added that “energy stocks, in theory, should benefit from higher prices, but the relative performance of the hydrocarbon sector has not been as tightly correlated with crude as seen in the past, possibly due to continued poor returns on equity.” And he said that oil prices influence inflation expectations, which can impact cyclical stocks versus defensive ones.
“When expectations rise, cyclical names typically outperform and thus the recent rotation toward the value end of the market may be sustained further by the recent developments,” he said.
The biggest takeaway from the attack, Fundstrat’s Thomas Lee wrote, was “the relative strategic vulnerability” of the oil supply chain. Lee noted the oil market was “disrupted by a few drones dropping less than $1 million of ordnance.”
Here’s a roundup of some stock sectors in Monday trading:
Oil Services, E&P Stocks
Oil servicers and exploration & production companies with high short interest are leading the way, with Whiting Petroleum Corp. soaring as much as 48%, the most ever. Refiners such as PBF Energy Inc. are underperforming given the harmful potential impact on margins.
READ MORE: U.S. to See More Completions, Higher Cash Flow, Hedges, Exports: BI
“High uncertainty will naturally fuel short covering,” Raymond James said in a note. The bank wouldn’t be surprised to see a rally in HLX, RES and NOV given oil leverage and short interest.
Offshore drillers including RIG, VAL, DO and NE are also to likely see a “large short cover bounce,” Citi said.
Saudi event is a “clear negative” for U.S. refiners, RBC said in a note. “The medium and heavy grades that Saudi produces are already in short supply, and a likely increase in oil prices could have a negative impact on demand given an already tenuous economic backdrop,” analyst Brad Heffern wrote. Retail margins for DK, MPC, PARR and PSX could be hurt.
Coastal refiners could see near-term headwinds, while diversified firms may be less hurt, Cowen said in a note. Integrated companies such as XOM could also see some equity price appreciation. There’s “limited direct upstream exposure to Saudi Arabia within the peer group, though TOT, BP and XOM all derive ~10% production from the Middle East,” analyst Jason Gabelman said.
Shares most likely to gain include XOG, WLL, CPE/CRZO, according to Citi. Natural gas-focused stocks, including RRC and SWN, may also benefit from short-covering, the bank added.
DNR, NOG and JAG are among E&Ps who lead Seaport Global’s E&P recommendations as companies with higher oil production as a percent of 2020 total production estimates.
Additionally, KeyBanc elected to upgrade JAG, CDEV, SM and WLL on Monday, citing a “likely high beta response” to crude’s rally.
In Canada, Eight Capital listed stocks with high short interest, including VET CN, BNE CN, KEL CN and ATH CN. “Expect Canadian oil stocks to rally significantly,” Haywood said in a note. Haywood recommended exposure to Canadian E&Ps including PXT CN, TOG CN, WCP CN, CPG CN, VLE CN and CVE CN.
Any impact to cruise operators will depend on “how long it takes engineers to get ~5.7m bbls/day of supply back into the markets,” Nomura Instinet’s Harry Curtis wrote. Carnival shares fell as much as 3.5%; Royal Caribbean Cruises is down 2.9%.
Read more: Cruise Stocks Lower Amid Oil Spike as Impact Remains Uncertain
Macquarie airline analyst Susan Donofrio said a short-term fuel spike is likely to have the biggest negative impact on American Airlines, Spirit Airlines and JetBlue, while it would have the least impact on Alaska Air, Southwest and Delta. American Airlines fell as much as 7%, the most since July 25; JetBlue dropped 3.5% and Delta tumbled as much as 4.6%.
Azul and Gol were the two worst-performing stocks in Brazil’s Ibovespa index Monday.
Read more: Brazilian Airlines Lead Ibovespa Losses as Oil Prices Spike
Publicly traded exchanges with commodities businesses rose. CME rallied as much as 1.7% and Intercontinental Exchange jumping as much as 3.7%, the most since Oct. 31.
Banks with Texas/Oil Exposure
Comerica and Zions Bancorp were among top KBW bank index gainers. Texas Capital Bancshares and BOK Financial rose more than 2% to their highest levels since early August.
Last week, SunTrust analyst Jennifer Demba had warned Texas E&P companies had limited or no access to the capital markets, which meant problem loans and charge-offs may be poised to rise.
Aerospace and Defense
Raytheon may benefit, as Saudi Arabia accounts for 5% of its total sales, Jefferies analyst Sheila Kahyaoglu wrote.
Raytheon and Lockheed Martin were the principal beneficiaries of foreign military sales in deals announced over the past six years, she added. Raytheon rose as much as 3.2%, extending its recent rally, while Lockheed gained 1.6%.
Chemical stocks were volatile as analysts looked for pricing implications from the attacks. PPG Industries was among the biggest decliners, while Lyondellbasell rallied as much as 4.9%, Dow gained as much as 3.7% and Westlake Chemical rose as much as 7.9%.