What happened
Crude oil prices picked up where they left off last week, rallying again on Monday. By 11:30 a.m. EST, the U.S. oil price benchmark, WTI, was up nearly 2% to more than $57 a barrel. That uptick sent several energy stocks soaring. Leading the way were Noble Corporation (NEBLQ), U.S. Silica (SLCA 0.19%), Centennial Resource Development (PR -1.85%), Whiting Petroleum (WLL), and Extraction Oil & Gas (XOG). All were up double digits by midmorning.
So what
Oil prices approached a six-week high on Monday as investors have started growing a bit more optimistic about the sector's prospects. Fueling today's bullishness was rising hope that the U.S. and China will resolve their trade dispute, which has been weighing on oil demand. In addition to that, Saudi Arabia continues to make progress on the initial public offering of its national oil company, suggesting that investors are warming up to the idea of buying shares.
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The rise in oil is fueling big gains in beaten-down oil stocks because they need higher prices to boost their fortunes. Oil producers like Centennial Resource Development, Whiting Petroleum, and Extraction Oil & Gas stand to benefit the most from higher oil prices since they make money by selling oil. That would give them more money to use for things like paying down debt and buying back stock.
Extraction Oil & Gas, for example, bought back $100 million of its shares during the second quarter while also retiring $14 million of debt at a 23% discount to face value. With oil prices improving, the company should generate more cash, which it can use to buy back additional shares and retire more debt.
Whiting Petroleum, meanwhile, has been using a combination of free cash and noncore asset sales to pay down debt. With oil moving higher, it could enable Whiting to accelerate its debt reduction program.
Centennial Resource Development, on the other hand, has been plowing all its cash flow into drilling more wells. Unfortunately, the slump in crude prices earlier this year forced the company to slow its growth rate. However, with oil prices picking back up in recent weeks, it might be able to reaccelerate in 2020.
Higher oil prices could also boost the fortunes of oil-field service companies like Noble and U.S. Silica. As a leading offshore driller, Noble benefits when oil companies spend more money on drilling new wells, which they'd be more comfortable doing if oil prices were higher. U.S. Silica, meanwhile, would also benefit from the increase in drilling activity that often comes with higher oil prices since it would boost demand for the sand it produces to frack new wells.
Now what
Investors are starting to grow a bit more optimistic about what lies ahead for the oil market, which is pushing prices higher. That's good news for the sector's weaker links, as they need higher oil prices to boost their financial results. The concern, however, is that oil market sentiment can change quickly, which is why investors shouldn't buy these oil stocks on the hope that crude prices will continue rallying -- because that might not happen.
