What happened
The oil market ended the first half of the year on a positive note. After hitting a 10-month low last week and sliding into the low $40s, crude reversed course this week and rose in each of the last seven trading days, closing up more than 6% for the week and above $45 per barrel. However, it's still down 5% for the month and nearly 15% for the year.
This week's rise came despite another dose of bearish oil-inventory data after crude supplies increased by 100,000 barrels this week, which was the opposite of the 2.6 million barrel inventory draw that analysts expected. The market, however, seemed to look past that number because several shale drillers said that they might slow down their drilling pace if crude remains in the low $40s. In fact, it appears that the industry is already starting to pull back the reins after recent data showed that drillers operated one less rig this week, which was the first decline in the oil-rig count in 23 weeks.
Image source: Getty Images.
So what
With crude oil barreling higher this week, it took off some of the pressure that had been weighing on shale stocks, fueling big rallies in many of the industry's more financially challenged drillers. Leading the way were Halcon Resources (HK), Midstates Petroleum (NYSE: MPO), and Approach Resources (AREX), which are all up more than 15% in the past week.
Midstates Petroleum is still trying to get back on its feet after emerging from bankruptcy last fall. Because of that, the driller only plans on running one rig this year, which will enable it to generate some excess cash, if oil cooperates, while it works to stabilize its production base by next year.
However, in a market where most of its peers can grow at a rapid rate, Midstates Petroleum is falling behind because its financial situation remains in a fragile state, especially given the recent weakness in oil prices. Its only hope is that oil continues to rally from here because it will give Midstates the financial flexibility to add another rig, which could fuel meaningful growth next year.
Halcon Resources is also working on stabilizing its production after emerging from bankruptcy protection last year. That said, it sees output dipping through the second quarter before recovering in the second half of the year, when it expects to bring several new wells online.
However, one thing that had concerned investors about that plan is that Halcon intends on outspending cash flow and financing some new wells with its credit facility, which is what got it into trouble in previous years. With oil falling in recent weeks, it made investors worry that the company might drill itself into another deep hole. The hope is that oil finds its footing so Halcon might not need to borrow as much money this year to bridge the gap between capex and cash flow.
Approach Resources, meanwhile, completed a strategic recapitalization last year to shore up its financial situation so it could increase its development pace this year. Doing so would enable the company to resume production growth later this year while living within cash flow if oil prices cooperate.
While falling prices in recent weeks put that plan in jeopardy, this week's rise gave investors some optimism that Approach Resources might not need to cut back spending. That said, if crude takes another dive, then all bets are off.
Now what
Don't let this week's oil-fueled rally fool you -- these oil stocks aren't yet on solid ground. While all three might have shored up their balance sheets over the past year, they have yet to stabilize their production bases. That leaves them at risk of falling further behind if oil prices remain weak because they're not going to generate enough cash flow to keep up with their stronger rivals.
