Please ensure Javascript is enabled for purposes of website accessibility

These 3 Oil Stocks Are Crashing on Crude Prices: What You Need to Know

By Jason Hall - Oct 14, 2019 at 4:47PM

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 oil continues moving lower, sending investors scurrying away from small, independent producers that may struggle without higher crude prices.

What happened

Shares of Antero Resources (AR 0.31%), QEP Resources (QEP), and Centennial Resource Development (CDEV -5.92%) all experienced double-digit declines on Oct. 14 (though Antero recovered before close). Today's big sell-off looks to have been sparked by a sharp decline in crude-oil prices. Both West Texas Intermediate and Brent Crude futures are down 2.2% today.

Today's decline looks like traders are losing much of the optimism that had them sending oil prices -- and some oil stocks -- higher on Friday, following positive news about both ongoing China-U.S. trade talks and Britain's negotiations to exit the European Union ("Brexit") with a trade deal in place.

Oil pumpjack in operation

Image source: Getty Images.

So what

There is tremendous speculation right now surrounding the global economy, and energy investors continue to swing from optimism to worry over the prospects for many oil stocks. Either the China-U.S. talks or Brexit alone makes for big news; the combined uncertainty of these two trade deals is simply massive. And as things stand today, if either one -- or heaven forbid, both -- were to fall short of a mutually acceptable trade agreement, the repercussions could include a further weakening of economic activity on a global basis.

How does a 2% move in oil prices send these small independent oil and gas producer stocks down by double digits? It all boils down to how oil prices translate to their bottom line, and today's 2% drop works out to about $1.23 less for every barrel of West Texas crude sold. Moreover, today's decline dropped Brent -- a major global benchmark for crude -- below $60 per barrel, after last Friday's rally moved it temporarily above that level.

Now what

The tug of oil prices is especially strong on QEP Resources and Centennial Resource Development. Centennial has spent much of 2019 trying to improve its returns and cash flow by cutting capital spending, and some of its hopes were tied to higher oil prices; with oil falling well below $60 per barrel, it will take even longer for the company to stop burning more cash than it generates. QEP may be in a state of limbo right now after having been close to a deal to go private over the summer, only for that deal to fall apart when the buyer reportedly lowered its offer.

For Antero, this morning's sell-off looks like it could have been a case of mistaken identity, since the company's primary focus is natural gas, not crude oil. That could at least partly explain why, after falling by double digits in early trading, Antero Resources stock rebounded and finished the day up 2.2%.

That's not to say its outlook is particularly rosy. On the contrary, the past couple of years, natural gas producers have struggled under a massive glut of gas that's not likely to go away anytime soon. For Antero, this has led it to continue producing gas at a loss, simply to have enough for the pipeline capacity it has already contracted.

Add it all up, and frankly, investors would do well to avoid all three of these companies for now. The oil market is being driven by even more speculation than normal, and small oil producers will live and die on the margins of oil prices that they can't control. And for Antero, even with a decent business and good operations, the natural gas market is probably in even worse shape than oil, with no end in sight that would push prices up in a sustained way.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

QEP Resources, Inc. Stock Quote
QEP Resources, Inc.
QEP
Antero Resources Corporation Stock Quote
Antero Resources Corporation
AR
$35.28 (0.31%) $0.11
Centennial Resource Development, Inc. Stock Quote
Centennial Resource Development, Inc.
CDEV
$6.52 (-5.92%) $0.41

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/23/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

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