Massive de-risking and fears of an economic recession are driving the sector down. Additionally the ETF impact causing a widespread sale of large caps, which are traditionally deemed as defensive for their large cash flow, low debt and high yield-buybacks.

The large cap oils have shown a very poor leverage to the commodity since 2001 and this last quarter results have proven it even more. Most companies have beat consensus in downstream (refining and chemicals) and eroded returns on E&P despite oil at high prices. This is because costs are rising, production growth has been poor and gas-heavy and share of economics of the fields from national companies (PSCs) increases with higher commodity prices.

The interesting thing is that services and E&Ps are benefitting from that environment but the market is pricing no earnings or margin recovery in services and no M&A-asset value upside.

E&P’s are discounting less than $85 crude (despite $110-$120 spot), suggests an economic crisis and market correction is expected. So E&Ps are selling off given higher capex spending, while services are not benefitting because of expected higher costs, and rotation out of Energy seems to be in full force.

Like in May-June 2010, we are likely to get a great entry point into attractive stocks. In the meantime, integrated megacaps have entered into negative EPS momentum, and with most dividend payments behind us, the yield protection is (mostly) gone.