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The Single Most Important Oil Stock Chart You May Ever See

The coronavirus pandemic of 2020 has wreaked havoc on the oil and gas industry. As of this writing, oil prices are down more than 60% from the 2020 peak as global oil demand has crashed under efforts to slow the spread of COVID-19. Simply put, the oil patch is in chaos, with global oil production likely to outpace demand for months to come.

Oil stocks have taken an absolute pounding. As a group, they're still well below 2020 highs, while the S&P 500 has recovered a substantial portion of its losses. As a result of the sharp bounce-back for a large portion of the market, many investors are now looking at oil stocks as a place to find opportunities for profit. At this writing, the Energy Select Sector SPDR ETF (NYSEMKT: XLE) is down 36%, the SPDR S&P Oil & Gas Explor & Prodtn ETF (NYSEMKT: XOP) is down 44%, and the SPDR S&P Oil & Gas Equipment & Svcs ETF (NYSEMKT: XES) is down almost 65%.

Image source: Getty Images.

However, investors may want to tread lightly: Many oil stocks are at all-time lows, but there might be more pain before the recovery. And even a recovery is no promise investors will profit. Before you buy oil stocks, keep reading for what could be the most important oil-stock chart you ever see.

A long history of value destruction

Energy drives the global economy, and it's a reasonable argument that crude oil could be the most important commodity on earth since it still fuels most of the world's transportation, produces a meaningful portion of electricity production, and serves as an input for the manufacture of plastics, fertilizers, and other industrial and consumer products we rely on every day.

But while oil is critically important, production is driven by a mix of state-controlled and private entities, and the cost of producing it can vary from as low as a few dollars per barrel to well above $50, depending on the source and where it's located. As a result, oil prices have proven incredibly volatile, and even the biggest and strongest oil companies have struggled to deliver consistent returns to investors.

This chart of the ETFs listed above sums up just how much shareholder value the oil industry has destroyed in recent history:

XLE Total Return Price data by YCharts.

You may be thinking, "That's just because the oil market has crashed twice in the past five years!" Sure, that's true. So, let's stretch things out a bit. How about the past 10 years?

XLE Total Return Price data by YCharts.

Ouch.

Let's take it one further, all the way back to the 2006 inception for XOP and XES:

XLE Total Return Price data by YCharts.

That's almost 14 years of immense value destruction -- and missed opportunity to invest in other sectors during a historic bull run.

These ETFs own a who's-who of U.S. oil stocks

These three ETFs are comprised of the largest U.S.-based oil and gas companies that are components of the S&P 500 index, with each ETF having a slightly different focus. The Energy Select Sector SPDR invests across all of the S&P 500 components that are in the oil and gas industry, and by market capitalization.

As a result, industry giants such as ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) combined make up almost 45% of the entire fund's investment. When you add refining and midstream giant Phillips 66 (NYSE: PSX) into the mix, that's more than half the ETF invested in these three large, diversified oil and gas giants. This mix, as well as the market-cap weighting structure, is why, of the three ETFs, this one has done the "best" in total returns, as the industry giants have helped cover for the massive losses by smaller losers.

The other two ETFs, though, are more concentrated in where they invest and also equal-weighted (meaning they invest the same amount in every stock). As a result, investors who've been more protected by the relative size of the industry giants in the Energy Select Sector SPDR, have been far more exposed to the pummeling that oil producers and most equipment and services companies have taken this year.

Image source: Getty Images.

The largest holdings in the Exploration & Production ETF are EQT Corporation (NYSE: EQT) and Range Resources (NYSE: RRC), producers that focus on natural gas. Combined, they make up about 11.75% of that ETF and are up 22% and 29% year to date as natural gas prices have actually increased on falling oil (and the accompanying associated natural gas) production.

On the other end of the spectrum, some of the smallest holdings in this ETF are oil-focused producers that used to make up much bigger portions of the fund but have crashed this year, including Occidental Petroleum (NYSE: OXY) and Denbury Resources (NYSE: DNR), troubled producers that could be at risk of bankruptcy. As a result, the beating the worst-performing stocks have taken has hurt investors worse than the strong returns of a few good performers can make up for.

Shifting to the Equipment and Services ETF, even the largest (read: best) holdings have had a horrible 2020. Baker Hughes (NYSE: BKR) makes up more than 7% of the fund, and its shares are down more than 40% year to date.

What goes down must go up? Not so fast

At some point, the oil and gas industry will recover, and yes, there will be winning oil stocks. But if there's a lesson the charts above give us, it's that even over very long periods of time, a recovery is no guarantee of profit for investors.

That's particularly true right now. The oil market is still in disarray, and the unprecedented glut of oversupply will wreak even more havoc on the sector for months to come before the recovery begins in earnest. So, before rushing to buy oil stocks that look cheap solely on the idea that the worst is over and the future should be profitable, remember the chart above, and invest accordingly.

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Jason Hall owns shares of Phillips 66. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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