Halfway through 2014, the world of energy has been a good place. The S&P Energy Index is up 13.23%, compared to the broader S&P 500's return of 6.94%. However, the energy sector has had its fair share of duds as well: Boardwalk Pipeline Partners (NYSE:BWP), Geospace Technologies (NASDAQ:GEOS), Hercules Offshore (NASDAQ:HERO), Alpha Natural Resources (NYSE:ANR), and Walter Energy (NASDAQOTH:WLTGQ) are to date the worst-performing energy stocks of 2014. Let's look at what happened to each of these companies and whether they can bounce back before the year is over.
5) Boardwalk Pipeline Partners, down 28.9%
The biggest sin a high-yielding master limited partnership can commit in the eye of an investor is to cut its dividend. So when the company slashed its distribution by more than 80%, investors headed for the exit in a hurry. As discouraging as that cut was, it was necessary for the company to get its financial house in order. With a debt-to-adjusted EBITDA ratio on the high end compared to its peers, Boardwalk needs additional cash to invest in projects without tapping any more debt.
Even after the massive cut, Boardwalk's distribution yield is still only 2.3%. Considering the yields that can be found at its competitors, don't be surprised if not too many investors are eager to hop on this stock.
4) Hercules Offshore, down 37.4%
Hercules is on the wrong side of one major industry trend: the need for new rigs capable of meeting the demands of deeper, more complex reservoirs. Hercules' entire fleet has an average age of 33 years, and only 5% of that fleet was built within the past 10 years. The company has done a commendable job of keeping rigs working when they are available, but since 2005 a total of 274 new jackup rigs have been ordered and come online, which has been eating away at Hercules' fleet. This was clearly on display when a potetnial three-year contract in Angola was delayed.
Hercules has a couple new rigs coming online that will head for the international market, where it has had better success with both contract length and dayrates. However, with so many older rigs sitting in the docks and a pretty bloated debt profile, it will be difficult for Hercules to refurbish its fleet with the newer rigs that the market appears to desire.
3) Geospace Technologies, down 41%
Geospace's biggest problem isn't the company itself, but rather its customers. As a specialist in seismic data equipment, it is subject to the capital expenditure budgets of oil companies, especially Big Oil companies that do a significant amount of seismic work offshore. These companies have been scaling back their capital budgets this past year, and one of the things that goes first is seismic studies related to exploration. This past quarter offered proof of that as Geospace saw revenue decline 10% year over year.
As long as Big Oil is focused on maximizing value for shareholders, Geospace's woes are likely to continue. Fortunately, these players cannot put off exploration work for long and will likely need the services of Geospace Technologies down the road.
2) Alpha Natural Resources, down 49%
I'm sure many people blame the EPA's recent decision on carbon emissions for Alpha's struggles as of late, but the company was struggling long before that. Not only have utilities been winding down their coal purchases overall, but the total coal consumption from Central Appalachia, where Alpha has a very large presence, has fallen off a cliff and the company has shuttered over 50% of its production. To make matters worse, the cost of production for its metallurgical coal is less than what it can sell it for, and the company has tried desperately to shut in as much production as possible.
With this production pace, Alpha can't produce enough in EBITDA to even cover its interest. While the company has enough cash on hand to cover the difference for a while, the prolonged lull will likely continue.
1) Walter Energy, down 66.6%
Considering how much Alpha Natural Resources has struggled this year in large part due to its metallurgical coal division, it should surprise no one that the worst-performing stock on the list is the company that deals almost exclusively in metallurgical coal. Prices for metallurgical coal have been steadily declining since 2011 as demand has waned in China, the one place that matters most when it comes to coking coal. This quarter, coking coal prices reached an unprofitable level of $120 per ton, putting strain on Walter and just about every coking coal producer. At this price level, Walter can barely cover its costs and debt obligations.
Unfortunately for coking coal producers, it doesn't look like the situation is going to get much better anytime soon. Australia's Bureau of Resources and Energy Economics recently revised its 2015 price for coking coal down to $110 per ton. This is especially concerning, as just a few months ago it expected a price hike to $134 per ton. At those prices, don't expect shares at Walter Energy to rebound soon.
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