Energy's Down Cycle Has Officially Had Its One-Year Anniversary

• Noble Energy, Inc. NBL shares have plunged 23 percent year-to-date, while shares of Pioneer Natural Resources PXD are down 3 percent.
• Morgan Stanley’s Evan Calio maintained Outperform ratings on both the companies.
• Black Friday marked the first anniversary of the current energy down cycle, with all subsectors underperforming, Calio said.

Black Friday marked the one year anniversary of OPEC's resignation as the market's "swing producer" and the beginning of the current downcycle, analyst Evan Calio said.

The prior cycle had peaked in June 2014. However, the Saudi-led move by OPEC to not reduce production in response to declining oil prices on November 27, 2014 “crystalized the beginning of the current down-cycle,” Calio wrote.

WTI prices declined 32 percent from their peak, prior to the November meeting. This dragged down the EPX by 24 percent.

Current divergence between equity and commodity performance reminiscent of 1H15, creates a headwind into 2016.

“Since October, E&P stocks have again decoupled from oil price performance similar to the divergence seen earlier in the year, albeit not as sizable,” Calio pointed out.

After the November 2014 meeting of the OPEC, the EPX outperformed WTI. Although outperformance peaked at 31.5pp in mid-March, the EPX was down 3pp versus WTI by the end of September.

“Since October, E&P stock performance has again decoupled from oil prices driven by a combination of an improving 2016 outlook (as E&P's become more financially disciplined) and upstream M&A. Since, the EPX has outperformed WTI by 12.3pp, peaking at 19.7pp 1.5 weeks ago (11/18/2015),” the Morgan Stanley report noted.

Calio believes that commodity divergence presents a near-term risk to equities. “In this environment, we continue to prefer well funded E&Ps operating in still economic resource plays that have the ability to withstand low oil prices for longer and flex production growth. We highlight NBL and PXD as two of our favorite Large Cap E&Ps at current levels.”