An aerial view shows an oil pump jack in Huntington Beach, California.
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For most of the past decade, a short bet on oil stocks paired with a bullish bet on the S&P 500 would have paid off handsomely. Energy companies consistently trailed the S&P 500, because oil producers chased unprofitable projects and produced too little cash flow. Over 100 oil-and-gas companies went bankrupt in 2020.
In the past few months, however, that dynamic has changed in a big way. Energy has been the best sector in the market this year. And it looks as if investors have gotten the message: The median short interest on oil and gas producers has fallen to 4% from 7% a year ago, according to MKM Partners analyst John Gerdes.
In general, short interest has declined this year — perhaps a result of the pain inflicted on short sellers who took aim at highflying stocks like GameStop (ticker: GME) In January. Short interest in the SPDR S&P 500 exchange-traded fund (SPY) dropped to 2.6% from 3.4% between Feb. 12 and Feb. 26.
Still, several oil and gas stocks face relatively high short interest.
The ones with the largest short interest as a percentage of their float include Continental Resources (CLR), Callon Petroleum (CPE), Matador Resources (MTDR), Range Resources (RRC), Antero Resources (AR), Murphy Oil (MUR), and Magnolia Oil & Gas (MGY). For each of those companies, short sellers have borrowed at least 10% of the float — a company’s shares outstanding excluding restricted stock — to bet against the shares. Continental’s short interest is the highest at 23%.
High short interest can be a sign of potential vulnerabilities at a company, and some of the names on this list are known for having relatively high debt loads, for instance. But in a market where oil prices continuously surprise to the upside, high short interest can also lead to bullish moves.
As GameStop investors discovered — and exploited — in January, short sellers can be forced to buy stocks in a hurry if they start to rise. That in turn can make those stocks rise even more. Anyone who held a short position on Continental shares on Feb. 26 is underwater today, at least on paper. The stock has risen 24% since that date.
Other oil-and-gas companies have relatively low short interest.
Companies with less than 3% of their float sold short include Royal Dutch Shell (RDS. A), BP (BP), Chevron (CVX), ConocoPhillips (COP), Exxon Mobil (XOM), Devon Energy (DVN), and EOG Resources (EOG).
Write to Avi Salzman at [email protected]
