What happened
Crude oil prices are falling sharply again on Feb. 27, continuing a week-long sell-off as coronavirus outbreaks spread and fears of a global economic slowdown take hold. As of 12:26 p.m. EST, both Brent and West Texas crude futures had lost more than 2% of their value. If today's decline holds, that will put crude prices down 12% since Feb. 20.
This sharp decline in oil prices is playing havoc with plenty of companies in the energy industry, with drilling contractors among the hardest-hit. Today six of the biggest onshore and offshore drillers saw their stocks fall by double digits in early trading, though some have recovered a bit.
But it's been an ugly week. If we go back to Feb. 20, when oil prices started falling, those six stocks have lost between 25% and 49% of their value:
| Company | Price change on 2/27 | Price change since 2/20 |
|---|---|---|
| Diamond Offshore Drilling (DO) | (10.8%) | (34.6%) |
| Nabors Industries (NBR -0.65%) | (8.9%) | (30%) |
| Noble Corp. (NEBLQ) | (4.3%) | (25.9%) |
| Seadrill (SDRL) | (13.3%) | (24.6%) |
| Transocean (RIG -2.69%) | (7.9%) | (26.7%) |
| Valaris (VAL) | (4.1%) | (46.1%) |
Prices given as of 12:25 PM EST on Feb. 27, 2020.
So what
Fears of weakening global oil demand, fueled by the spread of coronavirus and efforts to contain it, have been casting a pall over oil markets since mid-February. In its monthly oil markets report, the International Energy Agency revised its first-quarter oil demand based on the economic impact of coronavirus in China, announcing that it expected to see quarterly oil demand decline in Q1. If this prediction proves true, it would mark the first quarterly decline in global oil demand since the throes of the Great Recession more than a decade ago.
Image source: Getty Images.
Since that release, the news has only gotten worse: COVID-19, the illness caused by a new coronavirus strain, is rapidly spreading outside of China, sending markets into a near-panic as traders expect economic impacts to only worsen. As more countries take steps to minimize the spread of the disease, oil demand could fall even further than it was predicted to only weeks ago.
Now what
This sudden drop in oil demand is particularly concerning for oil drilling contractors, which make a living from the generosity of oil and gas producers. There will almost certainly be a reduced appetite for new drilling contracts in the near term, halting the momentum many drillers have seen over the past year as producers began investing in developing new resources, both offshore and onshore.
As the market stands today, there is simply far more supply already in place, along with significant capacity to add more supply, without the need for a significant amount of investment in drilling, to meet short-term needs.
We could look back on the recent sell-off as having been a buying opportunity on some of the better-capitalized drillers like Transocean and Nabors, and potentially Seadrill. But I think investors would do well to let things settle a little more before making any investments in this sector just yet.
Companies like Valaris and Noble could prove interesting risk/reward investments if management can turn them around, but their balance sheets aren't as strong, and if we see a significant weakening in spending by producers, both could find themselves in trouble relatively quickly.
