The price of crude oil jumped more than 3.5% on Friday due to several catalysts. This uptick fueled a big rally among energy stocks. Leading the way were Apache (APA -7.21%), Chesapeake Energy (CHKA.Q), Diamond Offshore Drilling (DO), and Valaris (VAL), which all soared double digits by 3 p.m. EDT.
Oil prices bounced back on Friday thanks to strong U.S. jobs data, a decline in the U.S. rig count, and optimism surrounding U.S-China trade talks. Those higher prices can directly benefit producers like Apache and Chesapeake since they make money based on the price at which they sell oil and gas. As such, it's no surprise to see their shares surge along with crude oil today.
The impact crude pricing can have on oil company profitability was abundantly clear in Apache's third-quarter report, which it released on Wednesday. The company posted a larger-than-anticipated quarterly loss due to lower pricing and production.
Because of that, Apache is taking action to reduce costs by restructuring its operations in a move that will save it $150 million per year. It also plans to reduce capital spending by 10% to 20% next year, which "will enable us to generate organic free cash flow that covers the current dividend and puts us on pace to fund a multiyear debt reduction program," according to the company.
Chesapeake, meanwhile, will post its third-quarter results next week. Given how challenging the oil and gas markets have been this year, the company will likely report weak third-quarter results. It also could join Apache in reducing its planned spending level for 2020.
Offshore drillers Valaris and Diamond Offshore Drilling might not produce any oil, but that doesn't mean its price doesn't impact their profitability. Both recently reported third-quarter results that showed how challenging lower oil prices can be on their financial results. Valaris, for example, posted a loss of $1.27 per share, while Diamond Offshore Drilling's loss came in at $0.67 per share.
Both companies, however, have recently secured new drilling contracts, as oil producers slowly wade back offshore. That should help boost their results in the future. However, the sector needs to see more stability in oil prices before oil companies meaningfully increase spending on new offshore wells.
Oil prices have been all over the place this year, which has made oil stocks quite volatile. While the market got some good news today, it's mood could sour quickly. That's why investors should be careful and not get too bullish based on today's optimism, since the oil market is not out of the woods just yet.