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Why These Top Oil Stocks All Tumbled More Than 10% in January

By Matthew DiLallo – Feb 7, 2020 at 10:15AM

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Fears that the 2019-nCoV coronavirus will significantly reduce demand for oil in China sapped crude prices. But not all producers would be equally affected.

What happened

Crude oil prices plunged in January due to worries about how the fast-spreading 2019-nCoV coronavirus would impact demand for fuel in China. The global oil benchmark, Brent crude, tumbled nearly 12% on the month, closing at around $58 per barrel. Meanwhile, West Texas Intermediate (WTI), the U.S. oil benchmark, plunged 15.6% and closed at about $51.50 a barrel -- its lowest level since August. 

That slump weighed heavily on most oil stocks last month, even top-tier U.S. drillers like EOG Resources (EOG -7.80%)Pioneer Natural Resources (PXD -7.79%), and Marathon Oil (MRO -10.94%). All three fell more than 10% in January, according to data provided by S&P Global Market Intelligence

Two oil pumps with a bright sun in the background.

Image source: Getty Images.

So what

Pioneer Natural Resources' share price dropped 10.8% last month due entirely to the double-digit decline in the price of oil, which will have a direct impact on its cash flow. However, that company is in a better position than most of its peers to handle lower prices because it hedges some of its production. Pioneer had contracts covering 80,000 barrels of oil per day in 2020, which is about 40% of its output.

In addition, Pioneer has a top-notch balance sheet, and low-cost operations which allow it to thrive even when oil is in the $50s because at those levels, it can still generate enough cash to expand its operations and pay its dividend. The only major downside to the slump in oil prices is that Pioneer will produce less free cash flow, which it intended to use on repurchasing more shares.  

EOG Resources, meanwhile, tumbled about 13% last month, again due entirely to weaker oil prices. And, while lower crude prices will cut into its cash flow, EOG too can still thrive at the current oil price. At $50 oil, for example, EOG can produce enough cash to grow its production at a double-digit percentage rate as well as pay its dividend with room to spare. Meanwhile, it has a cash-rich balance sheet, which gives it plenty of financial flexibility to continue operating if crude drops below its break-even level. EOG Resources had enough cash at the end of the third quarter to repay an upcoming $1 billion debt maturity and still have $600 million to spare. 

Finally, Marathon Oil experienced the biggest decline of the trio -- its stock tumbled 16.3% last month. Like its peers, its cash flow will take a hit from this slump in the price of oil. However, it too can produce enough cash at $50 a barrel to finance its capital program and dividend with room to spare. Meanwhile, it has the balance sheet strength to get it through a rough patch as well as the flexibility to trim capital spending if needed. As such, the main negative here for  Marathon is the same as it was for EOG -- it won't produce as much free cash as it would have at higher prices, meaning it will have less money available to route toward repurchase shares. 

Now what

The past month has been a rough one for the energy industry because of the uncertainty about how much the coronavirus will impact Chinese oil demand. However, even if oil prices keep falling, those declines won't hinder this trio of oil companies as much as it will others in the industry that have higher costs and weaker financial profiles. Because of that, these remain better options for investors who are looking for oil stocks to buy as a way to profit from a potential rebound in crude prices.  

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

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Stocks Mentioned

EOG Resources, Inc. Stock Quote
EOG Resources, Inc.
EOG
$109.12 (-7.80%) $-9.23
Marathon Oil Corporation Stock Quote
Marathon Oil Corporation
MRO
$21.90 (-10.94%) $-2.69
Pioneer Natural Resources Company Stock Quote
Pioneer Natural Resources Company
PXD
$208.99 (-7.79%) $-17.66

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

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