What happened
Crude oil closed lower again this week, with the U.S. oil price benchmark WTI falling more than 2%, to below $45 per barrel, and settling just above its low point for the year. This week's drop marked oil's fourth straight loss in a row, which is its worst losing streak since 2015. As was the case last week, fueling the sell-off was another dose of disappointing inventory data, which is confirming the market's worst fear that the oil glut isn't going away as quickly as hoped. That's worrisome news for weaker oil producers and service companies, which sold off this week.
So what
Hardest-hit was Halcon Resources (HK), which plummeted more than 25% this week. The shale driller struggled mightily over the past few years, which ultimately led to a bankruptcy filing that it emerged from last September with an improved balance sheet. That said, the company has quickly gone on a buying binge, including recently spending $88 million for land in the red-hot Permian Basin and exercising its option to acquire more land for $170 million. While the company plans to sell some non-core assets to pay for these transactions, that strategy could prove problematic now that crude has fallen below $45, because it will likely drive down the value of those assets. As a result, Halcon Resources will probably need to put most of these purchases on its credit facility, which is a decision that investors fear could cause renewed financial problems down the road if crude continues to slide.
Image source: Getty Images.
Another oil company hit hard this week by slumping crude was Resolute Energy (NYSE: REN), which plunged nearly 20%. As with Halcon, investors are worried that Resolute Energy's decision to take on more debt in funding acquisitions could sink it if crude continues to tumble. Just last month the company spent $160 million for more acreage in the Permian, financing the purchase with $125 million of high-yield debt and borrowings under its credit facility. While the company plans to sell its legacy Aneth Field in Utah to pay off some of those borrowings, the value of that property likely came down along with oil prices, which could make it harder to sell.
Meanwhile, frack-sand producers Fairmount Santrol Holdings (NYSE: FMSA) and Hi-Crush Partners (HCRS.Q) also fell sharply, down about 15% for the week. Lower oil prices played a part in that decline, because those prices might force shale drillers to cut back on new wells, which would reduce demand for frack sand. That could impact the plans of Fairmount Santrol and Hi-Crush Partners to raise prices and get their operations back into the black.
In addition to those concerns, rival U.S. Silica Holdings (SLCA 1.63%) announced its intention this week to build a $225 million frack sand mine in the Permian. U.S. Silica expects the mine to produce 4 million tons per year, with first production coming by the end of 2017. That plant is in direct competition with Hi-Crush Partners' recently acquired Kermit plant in the Permian, which is currently under construction and should start producing in the third quarter. The concern here is that this incidental capacity could add significant weight to frack-sand pricing later this year, especially if drillers start pulling back spending on new wells due to lower oil prices.
Now what
The oil industry expected that crude would average around $55 a barrel this year as a result of OPEC's efforts to drain the market's oversupply. That belief drove companies to open their wallets and spend heavily on drilling new wells, acquisitions, and capacity expansions.
However, all that spending is starting to come back to bite the sector, since it has unleashed a flood of new oil that's pushing down prices and taking oil stocks with it. It's a sell-off that could continue, unless producers ease up on the gas and slow down their growth projections.
