7 Questions to Consider When Holding Company Energy Stock in Your Portfolio

As an energy professional, you may own more stock in your company than the average Joe. For professionals at Shell, BP, and Chevron, many benefit plans provide company stock as compensation through employee stock purchase plans, restricted stock plans, performance share plans, or other stock incentive plans. While stock compensation can be a significant benefit, your portfolio's allocation may shift to a disproportionate amount of your company stock as time passes.

It's been rough owning energy stock over most of the last ten years, as energy has generally underperformed the broad market on a total return basis. However, due to the fast and furious recovery from the COVID-19 recession and the ongoing war in Ukraine, the energy sector seems to be the market's darling, as the best performing sector year-to-date and over the last 12 months.

energy stock year to date and 2021 - amundi-1*Historical data should not be taken as an indication or guarantee of any future performance. The chart above reflects data available through June 24, 2022. 


Why Diversify Out of Energy Stock Amidst A Positive Energy Outlook 

We are in one volatile market right now. The Fed is putting pressure on valuations by raising rates, China is dramatically slowing its manufacturing powerhouse to fight COVID-19, and Europe is at risk of stagflation from exorbitant energy prices. Bonds don't appear to be a safe haven either after one of the worst starts of the year returns over the last 50 years.

Learn more about our market outlook here >> 


What to Consider Before Holding or Selling Your Energy Stock

You may ask, "why should I be selling the one thing that is working to buy what appears not to be?" As you think about whether you should hold or sell the energy stock, consider the following:

Do You Have Enough to Replenish Your Cash Reserves?

We realize how important it is to set aside money, especially during these volatile times. Do you have significant upcoming expenses you may need to fund? Do you have at least a 6-month cash reserve set aside?

The energy stock may be the proper position to tap to replenish cash reserves and set aside money for near-term needs. Right now, energy has an incredible performance, and positive ongoing fundamentals provide a nice tailwind. Still, we have no idea what stock prices will do in the future. Situations can change quickly.  

And remember, vesting of restricted stock, options, performance shares, or the like is just a bonus paid out in the form of stock over cash. So, would you take some money to buy energy stock at today's prices? If not, then why are you holding the stock you just received?

What's Your Ideal Stock Sale Price?

Let's be honest the stock market has not been kind to energy companies over the last decade. The S&P500 is up 14.7% per year over the previous ten years ending 2020. XLE (an ETF that tracks energy companies in the S&P500) is only up 7.09%. Energy made up 11.3% of the S&P500 in 2007. Since then, it has gradually declined to about 2.67% at the end of 2021.

We've seen a massive increase in the price of oil and major energy companies due to increased demand following the COVID-19 recession and sanctions on Russia due to the war in Ukraine. Many never thought oil and gas prices would reach the levels we are at today—yet here we are. The last time oil prices crested $100 per barrel was in 2014. The last time we broke $120 per barrel was in 2008.

Think back to where that energy stock was a year ago. On May 31st, 2021, Shell was at $40.15, Chevron was at $108.45, and BP stock sat at $27.44.

As of June 7th, 2022, Shell is up to  $61.55, a  53.3% return, Chevron is up to $180.20, a  66.2% return, and BP is at $34.19, a 24.6% return. That is a massive return!

Almost nobody a year ago thought we'd be at the prices we are today. If we asked most people a year ago what price they'd be willing to sell their energy company stock, many would have said at a price lower than it is today. If that's the price you would have been willing to sell then, why aren't you ready to sell now?

How Much of Your Portfolio is Energy Stock?

If you only have 5% of your money in energy companies—that's not much concentration within your total portfolio. If there's a 50% drop (or more) in stock prices, it may not tank your portfolio or put you in a situation where you have to wait longer to retire or go back to work if you're retired. However, suppose you have 20% or more of your money in one stock or energy company overall. A drop in energy could tank your portfolio and leave you in a bad spot if energy prices fall dramatically.

Energy companies are doing quite well right now (and may continue to do well) in the under-supplied and increasing demand oil and gas world. Still, there are always company-specific risks we've got to watch out for. What if there is an Exxon Valdez or BP Horizon event?

Additionally, market forces can change quickly. What if we start seeing more countries impose windfall taxes on oil and gas as the UK has done? Just because energy stocks have done well recently and we're optimistic about energy right now doesn't mean things don't change. Unfortunately, sometimes they can change very quickly and without warning.

What's Your Future Overconcentration Risk?

If you are still working for an energy company, is your bonus correlated to the oil price? Have you already been granted restricted stock (RSUs), performance shares, or options that will vest over the next 3-5 years? If the oil industry plummets, are there more likely to be lay-offs (while your portfolio is down?) If so, this means your energy company stock concentration risk is much higher.

balancing your energy exposure in a portfolio - diversification in energy during a down market

If you're concerned about lay-offs or want to plan around an impending severance, learn more about your company-specific considerations here: 

Maybe the 5% you have today in Chevron stock is closer to 20% when considering the value of unvested grants. It's arguably more when you consider that your bonus and job are tied to the performance of oil and gas to some degree.

For almost all clients still working in oil and gas, we generally recommend they sell what they receive annually in share grants (at a minimum). Especially for people with energy overconcentration, we don't want to increase their energy exposure further. On the other hand, if energy performs well in future years, you can participate in the growth with the energy share grants you have already received when they vest. Additionally, your bonus may be more significant if the energy industry is doing well overall.


When's the Best Time to Sell Company Stock?

Deciding when to sell your company stock is a challenging question to answer in a blog and is driven by each individual's situation. For example, we believe energy could do well over the next five years. Still, concentration risk is dangerous in and of itself, especially if the same industry determines your compensation.

One strategy is to consider what the correct long-term allocation is for you. For example, suppose you have 20% of your portfolio in Chevron today. In the long run, you believe that Chevron will do well, but since your bonus and unvested share grants are also in Chevron, you want your portfolio to have no more than 5% of Chevron.

Great, you've set a long-term target to work from within your accounts. 

Systematic Selling & Diversification

One way to get there is systematic selling. You've decided you have 15% more of your portfolio in Chevron than you intend. Let's say you want to be at the long-term 5% about a year from now. If you sell 1% of your portfolio's value in Chevron every month for 15 months, you would be at your long-term allocation a little over a year from now (However, you will additionally have to adjust for future vesting of company stock as well). If Chevron's stock goes up, you will have some participating stock. If oil prices drop off a cliff eight months from you, you will have already sold some and be less concentrated. Systematic selling is an excellent hedging option to get you to your long-run allocation if you're struggling to make the whole move today.

Of course, ensure you understand the tax situation of the stock you're selling and consider adjusting your plan to consider taxes.

Minimizing Company Stock Risk Through Diversification

Let's say you just retired from BP and have 25% of your portfolio in BP stock. You know you're concentrated, you aren't receiving any more grants of stock, and BP's performance doesn't dictate your bonus or job. We often recommend that most people in this situation diversify out of energy stock. But, if your outlook on energy is positive, you may be hesitant to sell. One of the strategies we may recommend is holding a diversified basket of energy companies if you want to continue being invested in energy.

One option to consider is selling all the BP stock. With the resulting cash, you could put half into the market and the other half into a broad-based energy ETF or mutual fund. Utilizing these broad-based funds allows you to own stock from various companies like Chevron, Exxon, TotalEnergies, and Schlumberger, to name a few. While you've reduced some of your allocations to energy, you also have significantly less company-specific risk. If there is another major incident, such as the BP Horizon spill, it won't devastate your retirement. If the energy industry does well overall, your energy fund will participate.


Working With A Fiduciary Registered Investment Advisor 

Before you take any specific action, we recommend you speak with your advisor about your situation. The above examples are for general education and illustration and may not apply to your specific needs and circumstances. Your tax situation may create additional complexities in deciding when and how you should diversify. At Willis Johnson & Associates, we believe in a tailored, investment-based approach when managing our client's investments. You can learn more about our investment philosophy here.



Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Corporate benefits may change at any point in time. Be sure to consult with human resources and review Summary Plan Description(s) before implementing any strategy discussed herein. Willis Johnson & Associates is not a CPA firm.