What happened
The stock price of SandRidge Energy (SD -0.61%) fell a whopping 22% in December according to data provided by S&P Global Market Intelligence. That, however, was better than the 24% decline at Denbury Resources (DNR) and the huge 34% drop at Range Resources (RRC 3.25%). To suggest it was a bad month for this trio of U.S. oil drillers would be something of an understatement.
Check out the latest SandRidge Energy, Denbury Resources and Range Resources earnings call transcripts.
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Looking a little longer term, the month really just capped a pretty awful year. Range was down 43% in 2018, SandRidge declined 63%, and while Denbury's 22% full-year slump seems relatively modest at first blush, the stock is off 74% from the highs it reached in October. Clearly, 2018 was a year to forget for these oil drillers, and the steep December declines left the year ending on a particularly bad note.
So what
As with most oil and natural gas drillers today, the big story here is energy prices. Oil was the news-catching trouble spot in 2018, with the fuel quickly falling into a bear market in the last few months of the year. The drop was swift and painful, and a little unexpected. However, there's more going on here than meets the eye.
The oil number that most people see quoted is the global oil benchmark Brent Crude, which fell around 20% for the year. However, Range, SandRidge, and Denbury are all U.S.-focused drillers, so a key benchmark for them is West Texas Intermediate (WTI), a measure of U.S. oil prices. That figure fell even further than Brent in 2018. The reason for the difference between the two oil benchmarks is all about supply and demand, but with a slightly different twist: It's being driven by infrastructure.
U.S. oil and natural gas production has increased rapidly in recent years, and there simply isn't enough infrastructure to move and process it. Building the needed pipelines and processing facilities is a huge opportunity, and these assets are slowly getting built -- but that doesn't help move the fuels today. With more oil and gas than capacity to process it, there is a supply glut of these fuels in key producing regions. Too much oil and gas and no way to move it has, not surprisingly, resulted in a weak pricing environment. This is a major headwind for U.S.-focused drillers over and above the larger global energy landscape. Range, SandRidge, and Denbury are all impacted by this second-layer energy issue specific to the U.S. market.
Range Resources is looking to grow production within its cash flow generation, while also trimming its debt load. Those are great goals, but doing both becomes increasingly difficult if energy prices are weak. And it's even more problematic if prices are falling. SandRidge has been trying to increase its oil production, which may be a good long-term goal, but over the short term it looks like a questionable move. Low energy prices won't make the shift any easier to afford.
Denbury, meanwhile, is heavily weighted toward oil, and perhaps more important recently announced plans to buy Penn Virginia Corporation for $1.7 billion. Investors have taken a very dim view of the acquisition, which has been a key driver of Denbury's dramatic stock price decline since the October highs. Falling energy prices just make the deal look even less desirable over the near term.
Now what
Energy prices are likely to remain volatile. That shouldn't be a surprise to anyone who watches the space, but it's something that investors need to keep in mind during industry upturns and downturns. Right now, meanwhile, investors also need to monitor the unique circumstances in the onshore U.S. market, which have made WTI prices even more volatile than what you see on the global stage. Every company has its own story to tell, like the Denbury/Penn Virginia deal -- but when it comes to U.S. energy drillers, the infrastructure backstory is one that affects most, if not all, players.
