Please ensure Javascript is enabled for purposes of website accessibility

Why Oil Stocks Are Getting Pummeled Today

By Matthew DiLallo – Updated Nov 20, 2018 at 3:43PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Crude prices continue to fall off a cliff.

What happened

The bear-market mauling of crude oil prices continued on Tuesday, with oil falling another 7% on the day, which pushed the U.S. oil benchmark price, WTI, to around $53 per barrel. That sell-off in the oil market weighed on oil stocks, sending most down sharply. Among the biggest decliners were Seadrill (SDRL), Weatherford International (NYSE: WFT), Oasis Petroleum (OAS), Denbury Resources (DNR), and Baytex Energy (BTEG.F -0.80%), which all dropped double digits by midafternoon.

So what

Crude prices plunged to a new one-year low, driven in part by the broader sell-off in the stock market. One of the issues that has been troubling the market in recent weeks is a potential slowdown in the global economy, which would cause oil demand to weaken. Those worries of weaker demand are coming at the same time crude supplies are rising, which is causing concern that the oil market could have another glut on its hands.

A bright red arrow going down.

Image source: Getty Images.

The slump in oil prices is hitting oil stocks hard. That's because it will impact the cash flows of oil producers like Oasis Petroleum, Denbury Resources, and Baytex Energy. That's especially concerning for Denbury and Baytex because both have hefty debt loads that they were hoping to pay down with the cash flows earned by higher prices. However, the plunging prices are putting renewed pressure on their balance sheets. In addition to that, the slump in oil prices could impact Oasis Petroleum's 2019 growth plans, since the company is targeting to live within its cash flows, which are now on pace to decline, likely taking its drilling budget down with them.

The potential need of oil producers like Oasis to cut spending for 2019 will impact industry activity levels. That could hamper the prices of oil-field services as well as equipment lease rates, which would hurt companies like Seadrill and Weatherford International. Both oil-field service companies need higher rates for the services and equipment they provide oil companies so that they can generate more cash to pay down debt, which has weighed them down in recent years. Seadrill, for instance, ended up declaring bankruptcy due to its debt issues, while Weatherford might be heading in that direction if market conditions don't improve.

Now what

The sell-off in the oil market is punishing financially weaker oil stocks. That's because they have the most to lose if crude continues tumbling, since they need higher prices to bolster their financial positions. That's why investors should steer clear of these oil stocks and consider one of these top options instead.

Matthew DiLallo owns shares of Denbury Resources. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.