The market hammered small-cap oil and gas exploration and production companies Oasis Petroleum (NYSE:OAS), Denbury Resources (NYSE:DNR), and Whiting Petroleum Corporation (NYSE:WLL) in May, with Whiting down 17.3% for the month, Oasis down 18.1%, and Denbury down a crushing 30.1%.
Many oil-industry companies lost ground in May, but these three companies were hit particularly hard, especially Denbury. All three have market caps of less than $2.3 billion, and all three have sizable operations in North Dakota and Montana.
Oil and gas exploration and production companies are usually the first to get clobbered when oil prices drop, as they did at the end of May. Without midstream or downstream operations to provide some ballast to the companies' portfolios, those drops can be sudden and severe. In May, there were plenty of midsize oil producers whose shares dropped more than 10%, but smaller companies like these three can be especially volatile when oil prices go south.
Indeed, Oasis' and Whiting's shares largely tracked the overall industry through most of the month, before experiencing steep declines as oil prices dropped in the final week of May:
This isn't surprising, as Oasis and Whiting are similarly sized companies, with market caps of about $2.2 billion. But while Whiting produces almost twice as much oil and gas than Oasis dies (117,360 barrels of oil equivalent per day in Q1 2017, vs. 63,192 BOE/d for Oasis), Oasis has less long-term debt ($2.3 billion vs. $3.5 billion). However, Oasis managed to post an adjusted net profit in Q1, as opposed to Whiting's narrow adjusted net loss.
Denbury is far smaller, with a market cap of just $567 million. It's also far more indebted for its size, with $3 billion in long-term debt. Denbury is primarily a tertiary producer, which uses carbon dioxide to extract oil and gas from exhausted wells. It, too, posted an adjusted net loss in Q1.
But one big factor in all three companies' outsize drops was the location of their operations. Because North Dakota and Montana are far away from ports and refineries, oil produced there is more costly to transport than, say, oil produced in the Gulf Coast state of Texas. Not to mention, because of low pipeline capacity -- even with the Dakota Access Pipeline coming online this month -- much of the oil has to be transported by more-expensive rail or even by truck. That affects the value equation and makes oil from the region less attractive at low oil prices.
Like ships on the ocean, the smaller you are, the more the rough waters toss you around. Investors in smaller oil producers in this region should expect to see stock price volatility as the oil markets change, with Denbury particularly turbulent.
With all three companies' debt loads exceeding their market caps, though, and with Whiting and Denbury posting adjusted net losses, there are better opportunities in the oil patch.