This past week has been a tough one for investors as the market took another tumble, fueled this time by trade war fears. Given that sentiment, it wasn't a good week to be reporting fourth-quarter earnings, which was the case for many oil stocks. Several got punished for reporting less-than-stellar numbers and outlooks, including California Resources (CRC), Carrizo Oil & Gas (CRZO), Halcon Resources (HK), Ultra Petroleum (UPL), and Bill Barrett (HPR). While it's easy to justify most of those sell-offs, one stood out as not making any sense.
Still struggling
California Resources led the downdraft, tumbling 33% this week after reporting fourth-quarter results. While the California-focused oil producer didn't lose as much money during the quarter as feared, production declined 6.6% due to several issues, including wildfires in the state during December. On top of that, costs increased because of higher maintenance and energy expenses. Those issues showed that California Resources still has a long road to recovery ahead of it before it's back on solid ground.
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Carrizo Oil & Gas, meanwhile, fell about 24% this week after releasing its fourth-quarter report. While the oil stock also beat earnings expectations, its disappointing outlook overshadowed those results. The main issue was Carrizo's expectation that oilfield service costs would rise by double digits this year, which would slow down its production growth engine. While Carrizo Oil & Gas wasn't the only producer to caution investors about service cost inflation, its smaller-scale operations made it harder for the company to offset the impact.
Halcon Resources slumped about 24% this week after reporting weak fourth-quarter results. The oil producer unveiled a much larger loss than expected due to a big spike in operating costs. The main culprit was the fact that Halcon sold its legacy Bakken Shale assets and no longer benefited from the scale it enjoyed from being a larger producer. While the company hopes to rebuild that scale by growing production from its retained assets, that will take time, which will weigh on profitability in the meantime.
Ultra Petroleum declined about 19% this week following the release of its fourth-quarter report. While Ultra reported expectation-beating earnings, its outlook disappointed. The company said it plans to slash spending 30% this year so it can generate free cash flow. That cut will hold back its ability to increase production, causing the company to grow at a slower rate than many rivals.
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A bit of a head-scratcher
Bill Barrett also had a rough week, with the oil company's stock tumbling more than 17%. That sell-off came in spite of the fact that the company reported a $1.1 million profit for the fourth quarter while analysts expected a loss. Investors, however, overlooked that result and instead focused on the company's outlook. Bill Barrett warned that due to a third-party infrastructure issue, production in the first quarter would remain flat with last quarter, which is a disappointment for a company that increased output 37% last year. Further, the company didn't provide a forecast beyond the first quarter.
That said, the reason Bill Barrett didn't give a longer-term outlook is that the company is in the process of merging with Fifth Creek Energy, which will significantly improve its balance sheet and scale. The company will probably provide a longer-term forecast after the deal closes later this month, which will likely show that the combined entity can deliver enhanced production and profit growth in the coming years.
A better deal on a soon-to-be better company
Halcon, California Resources, Ultra, and Carrizo all sold off for understandable reasons since these smaller producers are still struggling in the aftermath of the oil market downturn. That said, it's harder to justify Bill Barrett's sell-off since it's about to become a much stronger company that should reaccelerate after getting past a temporary infrastructure issue in the first quarter. That's why I think Bill Barrett seems like an even more compelling option for investors looking for a fast-growing, though higher-risk, oil stock after selling off this week.
