S&P 500 changes could pressure energy stocks

By OGJ editors

HOUSTON, July 17 -- US energy stock prices could come under increasing pressure now that Standard & Poor's has decided to drop seven non-US companies from its benchmark S&P 500 index effective after the close of trading on July 19.

One of the seven companies is Royal Dutch Petroleum Co. of the Netherlands. Royal Dutch and Shell Transport & Trading Co. PLC of the UK jointly own Royal Dutch/Shell Group.

Royal Dutch holds 60% interest in Royal Dutch/Shell, while Shell T&T holds 40% interest.

S&P is replacing seven non-US companies with US companies in order to make the index "a better reflection of the large-cap segment of the US equities market," David M. Blitzer, chairman of the S&P Index Committee, said in a news release.

Impact questioned
But at least two oil and natural gas company analysts question the possible overall impact on energy-related stock.

The S&P will not replace Royal Dutch Petroleum with a US-based energy company, said James M. Rollyson, a Houston analyst with Raymond James & Associates Inc.

"As such, the energy weighting of the S&P 500 will drop from 7.3% to 6%. . .That means that index funds and the myriad of other fund managers that are benchmarked against the S&P 500 will see their current relative energy weighting move up dramatically. As index funds and other active fund managers bring their portfolios back in-line to their desired energy weightings, energy stocks overall are likely to be under (selling) pressure," Rollyson said.

Specifically, oil service companies could also be dropped from the S&P 500, Rollyson said, noting that the industry segment has seen much consolidation in recent years.

"If these companies were to be dropped from the S&P 500 without being replaced by other energy companies, the overall energy weighting would fall further to 5.5% and could put additional pressure on energy stocks," he said.

But the removal of service companies does not appear likely and would have a smaller combined impact than the removal of Royal Dutch Petroleum, he said.

"If fact, based on recent commentary, it appears likely that Standard & Poor's will spare companies with US-based operational headquarters. Hence, the downside risk in energy stocks beyond this week may be limited," he said.

Energy stock prices
Oil and natural gas stocks have fallen faster recently than the stock prices of other industries in recent weeks, said Thomas R. Driscoll, a Lehman Bros. Inc. analyst based in New York.

"Large-cap, US-based E&P stocks have fallen roughly 11% over the past 6 trading sessions. This compares with a 6% drop in the S&P 500 over the same period. Extremely weak US equity markets and the removal of Royal Dutch from the S&P 500 all had an impact on energy stocks last week, as did falling natural gas prices," Driscoll said.

Barring a rebound in natural gas prices, Driscoll believes US exploration and production companies' stock prices "will weaken in the near term and that investors should mostly stay on the sidelines."