After selling off sharply last week, crude oil got its mojo back this week. The U.S. oil benchmark West Texas intermediate price rose more than 3% on the week, closing at around $47.50 per barrel. The catalyst that drove crude higher was a return to optimism that OPEC will extend its output cut when it meets later this month.
Oddly enough, one of the drivers of the view that OPEC will continue its production reduction is rising output from the rest of the world, especially from U.S. shale. Just this week, the organization put out a forecast that non-OPEC supplies would rise by 950,000 barrels a day this year, which is higher than its initial outlook. As a result, the market believes that OPEC has no choice but to continue its cuts, so oil prices don't crash.
That oil price optimism provided a boost to oil stocks this week, especially those still reeling from the market downturn. But many of the biggest gainers this week combined that oil-inspired rally with improving first-quarter results and optimistic outlooks. Leading the way, according to data from S&P Global Market Intelligence, were Approach Resources (NASDAQ:AREX), Bonanza Creek Energy (NYSE:BCEI), and SandRidge Energy, and Enerplus (NYSE:ERF).
Approach Resources, SandRidge Energy, and Bonanza Creek Energy share one commonality in that all three companies have undertaken deleveraging transactions over the past year to get back on their feet. However, despite the efforts to shore up their balance sheets, all three companies need stable crude to drive growth. That was evident over the past week, when all three companies reported first-quarter results. Bonanza Creek, for example, announced that its production plunged 28% over the past year because of its financial situation. But thanks to a cash infusion upon emergence from bankruptcy, the company plans to slowly get back to work on drilling new wells, which is music to investors' ears.
Meanwhile, SandRidge Energy is also slowly ramping back up, with plans to grow oil output in the second half of this year. Further, the company stated in its earnings release that "depending on well results and commodity pricing, capital spending plans may be revised later in the year." Investors hope that this week's rally in the oil market will continue and give SandRidge the confidence and the cash to boost spending and drill more wells. Approach Resources, likewise, touted the positives when it reported first-quarter results. CEO Ross Craft boasted that "we accomplished a great deal this quarter and our transformation is on track." Among the highlights was $145 million in debt reduction, which along with the completion of a strategic recapitalization, has increased its financial flexibility. As a result, Approach Resources was able to boost its capital budget, which it can fund entirely out of cash flow at current commodity prices thanks to the reduction in interest expenses.
Enerpus, on the other hand, has been able to stay afloat during the downturn without outside assistance, because it had a stronger balance sheet heading into the market crash. Yet the company did struggle along with the rest of the industry, which is why it's glad to see higher oil prices this year. That optimism was apparent in its recent first-quarter report, where CEO Ian Dundas stated that "the rate of change in our financial metrics has been significant over the last twelve months." Because of that improvement, Enerplus is on pace to boost output 25% by the end of this year, assuming of course that crude prices don't crash again.
The oil market has been doing its share of flip-flopping over the past few months, because it's unsure what OPEC will do. This week it flipped back toward optimism, which, along with positive outlooks, provided some rocket fuel for weaker shale drillers. However, as has been the case over the past few months, that optimism can quickly wane, causing oil stocks to flop. Investors should thus stay away from all by the top-tier oil companies right now, because the market is a long way from being in the clear.