This week was an awful one for stocks. After steadily rising for months, the market took a nasty tumble, which pulled virtually everything down with it. However, some energy stocks got clobbered even worse this week after making headlines that disappointed investors and led them to dump their shares. Among the worst performers were NuStar Energy (NS 3.07%), NuStar Holdings (NSH), Tallgrass Energy Partners (NYSE: TEP), Tallgrass Energy GP (TGE), and ExxonMobil (XOM 2.23%). Exxon's inclusion on this list is a stunner, with the oil giant turning in its worst daily decline since 2011 and following that up with an even worse drop the very next day.
Reorganizations didn't go over well
Pipeline and terminal master limited partnership (MLP) NuStar Energy and its parent NuStar Energy Holdings tumbled 28% this week after announcing that they'll merge into one entity, with NuStar Energy being the surviving company. As part of that reorganization, NuStar Energy will reset its payout 45% lower than the current rate, freeing up $200 million in annual cash flow to improve distribution coverage, reduce leverage, and help finance future growth initiatives. "As we carefully considered all the alternatives, in every scenario, a distribution reset was a necessary part of the overall prescription to position us for the future," according to CEO Brad Barron. That said, it clearly didn't sit well with investors, who had grown accustomed to the generous quarterly distributions.
Fellow pipeline MLP Tallgrass Energy Partners also stumbled this week, falling 15% after revealing that it's evaluating a similar organizational restructuring with its parent Tallgrass Energy GP, which dropped 8% this week. That proposal was one of a series of announcements from the two companies, which also included Tallgrass Energy Partners' acquisition of an additional 2% interest in the Pony Express Pipeline and Tallgrass Energy's purchase of a 25% stake in the Rockies Express Pipeline. The concern investors have is that if Tallgrass Energy Partners merges with its parent, the combined company could follow NuStar's blueprint and slash their lucrative payout.
A beaten-down oil giant
ExxonMobil's stock sank 12% this week, which is a huge drop for the oil behemoth. It came on the heels of Exxon's fourth-quarter results, when the company missed analysts' earnings expectations by only posting a profit of $0.88 per share when they expected it would earn $1.03 per share. One of the issues was that production dropped 3% versus the year-ago period due to the natural decline of legacy wells. Meanwhile, the company reported weaker results in its downstream refining operations, due in part to the impact of higher oil prices during the quarter.
Analysts didn't like what they saw, which led Barclays to cut its rating from overweight all the way to underweight because the company's "underlying fundamentals appear to have suffered a structural deterioration." The view that Exxon is falling behind its peers led the bank to say that investors should go with big oil rival Chevron instead of Exxon since its fundamentals are getting better at a faster pace than rivals'.
That said, Exxon has a plan to address those issues, with it expected to invest $50 billion into the U.S. over the next five years in a bid to boost production and profits. While it will take some time for those investments to pay off, Exxon has historically delivered peer-group-leading metrics and fully intends on fighting its way back to the top.
A sale worth considering
While the plunge in the quartet of MLPs might have been an overreaction by the market, the stampede out of Exxon was nonsensical. Sure, the quarter wasn't great, and Exxon has some problems to fix, but it's hard to justify wiping out $60 billion of market value when nothing fundamental has changed in either its business prospects or the price of oil. That's why investors might want to consider taking advantage of this week's sell-off and scoop up shares of the oil giant's now 4%-yielding stock.