Oil isn’t such a great investment after all…especially Nexen Inc.
Looks like oil and gas stocks weren’t immune to the stock market crash as I had been hoping. As has been written a number of times on this site, it was expected that markets would crash but it was hoped that oil stocks would outperform as record earnings were expected given that oil prices in the second quarter were the highest ever. As expected, the general market crashed but unfortunately oil stocks joined the crowd and have now corrected 15-20% from their peak.
Oil stocks (e.g. Nexen Inc. T-NXY, N-NXY) were hit with a double whammy of relatively poor earnings and dropping crude oil prices. Oil is now down over $20 a barrel from its peak. The far worse news for Nexen was its pathetic earnings.
Nexen’s second quarter earnings release seemed to be a rather large string of disappointments: oil production volumes were down 6%, the marketing division lost a whack of money and some of the production volume was held in inventory instead of being sold in the quarter. The worse component of the earnings was the huge equity compensation of over $300 million which knocked $0.45 off the earnings per share to a paltry $0.70…this compares to the Q1 results of $1.17. I was forecasting Q2 earnings closer to $1.68 and had bought July call options on both Nexen and Petro-Canada. Obviously after the poor Nexen earnings release, the whole oil sector sold off 10-15% putting my call options out of the money where they expired worthless.
My only saving grace on the loss was the fact that I had earlier sold my stock positions and replaced them with the call options so that when the stocks dumped, I “only” lost the premium. Had I been holding shares instead of call options, my losses would have been much higher. Still, losing $3 to $5 on call options instead of $10 on the stock is small consolation.
I had originally intended to buy more call options on oil stocks if the July strategy didn’t work, but after the poor earnings release and the continuous sell off in oil stocks I didn’t make anymore purchases. The oil market seems to be very bearish right now and until there are signs that the market has bottomed, I won’t be buying anymore stocks or call options.
I’m expecting that as more oil companies report their earnings, their earnings will also be negatively impacted by large executive equity compensation plans i.e. execs are given large equity positions if the share price increases over a certain price.
Lesson Learned:
Expect a stock that has been doing well to report weaker than expected earnings as a result of the executive equity compensation plans. Stocks that end the quarter close to a record high price will have higher compensation expenses than a stock that is far from its high as the company has to mark to market the stock positions that are owed to the executives.
Also don’t get greedy by doubling up on cheap option positions when the stock trades down especially when the general market is already in a recession.
My investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security.

