After steadily rising for nearly a month, the price of crude oil reversed course this week, falling more than 6% and closing below $50 per barrel. Fueling the sell-off were a myriad of concerns including election worries in France and rising U.S. oil production. Those anxieties more than offset bullish comments by several OPEC members that the organization was warming to the idea of extending their output cuts further into 2017.
That dive in the oil market was the only reason most energy stocks needed to spark a sell-off this week. Leading the downdraft, according to data from S&P Global Market Intelligence, were Fairmont Santrol (NYSE: FMSA), Hi-Crush Partners (HCRS.Q), W&T Offshore (WTI 1.92%), Sanchez Energy (NYSE: SN), and Oasis Petroleum (OAS).
This week's biggest losers fit into two camps: frack sand producers and financially weaker oil companies. Leading the sell-off were the sand producers, with Fairmont Santrol enduring the sharpest plunge of more than 22%, while Hi-Crush Partners slumped more than 15%. Driving the selling was the belief that falling oil prices could impact demand for frack sand, which would hurt profits. Another weight on Fairmont Santrol was a downgrade by Barclays, which cut the stock from overweight to equal weight, and reduced its price target from $9 to $7. It did so citing the recent discovery of "numerous sand deposits located in the heart of the Permian," which could impact Fairmont Santrol's volumes.
Meanwhile, the oil price plunge was the only fuel behind the sell-off of producers W&T Offshore, Sanchez Energy, and Oasis Petroleum. The reason crude had such an impact on these stocks is that all three companies need oil above $50 per barrel to fuel their growth plans. Specifically, Sanchez Energy's go-forward plan to deliver 20% compound annual production growth over the next three years while pushing leverage to a more comfortable level by next year requires $55 oil. Because of that, the longer crude lingers below that price, the more likely Sanchez Energy will be to trim its forecast, to avoid getting any deeper into debt.
Oasis Petroleum, likewise, needs oil above $50 to drive its growth plan, which includes doubling its rig count in the Bakken shale to four later this year and adding a fifth rig next year. However, if oil slumps for an extended period, the company might not be able to comfortably continue that plan, putting its ambitious goal of delivering double-digit annual growth at risk.
Low oil prices have caused W&T Offshore to teeter on the brink of bankruptcy for much of the oil market downturn. However, after completing a deal with creditors to shore up its balance sheet last year, the company put a plan into action to boost output by 4% in 2017 now that oil appears to be on the mend. That said, given the renewed selling in the oil market and W&T Offshore's fragile finances, the company needs oil to stay above $50 a barrel to ensure that it can stay afloat.
There's still a lot of uncertainty in the oil market these days. While OPEC has stepped in by cutting its output, that seems to have only incentivized shale drillers to boost their production. Many are doing so with aggressive plans that they can't completely fund with cash flow, which is unnecessarily pulling production forward and keeping a lid on prices. The result is an oil market stuck in neutral while it continues burning off old supplies, which will take more time, especially if OPEC doesn't extend its production cuts. For now, investors would be better off avoiding weaker players, because they're just not strong enough to thrive in the current market environment.