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Why Oil Stocks Are Tanking Today

By Matthew DiLallo – Feb 24, 2020 at 12:58PM

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Oil prices are plunging on fears that the coronavirus will impact demand.

What happened

Crude oil prices tumbled on Monday. Both WTI (the U.S. benchmark) and Brent (the global benchmark) fell about 4.5% by 10:45 a.m. EST to $51 and $55.75 a barrel, respectively. That slump in the oil market weighed heavily on energy stocks, especially shares of financially weaker companies. Leading the decliners were Valaris (VAL)Nabors Industries (NBR -13.96%)Kosmos Energy (KOS -13.38%)Oasis Petroleum (OAS), and Parsley Energy (PE). Each one slumped by around 10% at one point in the trading day. 

So what

The number of coronavirus infections outside of China spiked over the weekend in places like Iran, Italy, South Korea, and Japan. That has increased the risks of it impacting global economic growth, which could dent demand for oil. That prospect for lower consumption added more weight to crude prices, which have already been under pressure due to an overabundance of supply. 

A man holding a miniature barrel of oil with caution written on it in one hand and cash in the other hand.

Image source: Getty Images.

Today's slump in the price of crude put pressure on the stock prices of almost every company related to the sector. Kosmos Energy, Oasis Petroleum, and Parsley Energy all produce oil. Thus, today's sell-off will have a direct impact on their cash flows if oil remains at these lower levels. That would make it harder for each one to produce the money it needs to fund operations and maintain debt. Because of that, they might need to reduce their capital spending if crude prices continue to weaken, which would impact their growth prospects.

Valaris, meanwhile, operates offshore drilling rigs while Nabors operates onshore rigs and provides a variety of oil-field services to both sectors. While the sell-off in oil prices won't directly impact their cash flows, it could have an indirect effect. That's because oil companies might pull back spending on new projects, which would affect the rates they charge customers. Those lower prices would weigh on the cash flow those companies produce, making it harder for them to maintain their debt, which is a concern for Valaris after its debt spike last quarter

Now what

The oil market is growing worried that the spreading coronavirus will start cutting into oil demand, potentially pushing crude prices even lower and negatively impacting the cash flows of producers and the companies that provide equipment and services to the sector. That will make it even tougher for the sector's financially weakest players to stay afloat, which is why so many are selling off today.

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

Valaris plc Stock Quote
Valaris plc
Oasis Petroleum Inc. Stock Quote
Oasis Petroleum Inc.
Nabors Industries Ltd. Stock Quote
Nabors Industries Ltd.
$94.40 (-13.96%) $-15.31
Kosmos Energy Ltd. Stock Quote
Kosmos Energy Ltd.
$4.92 (-13.38%) $0.76
Parsley Energy, Inc. Stock Quote
Parsley Energy, Inc.

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

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