Independent oil producer stocks are taking it on the chin once again. At this writing, a large group of independents is down 14% or more on March 11 in early-afternoon trading, tacking even more losses onto a horrendous 2020 that's seen the group lose more than two-thirds of its value:
|Company||Price Change on 3/11||Price Change From 2020 High|
|Centennial Resource Development (CDEV -7.78%)||(17.9%)||(89.8%)|
|Diamondback Energy (FANG -5.77%)||(13.98%)||(73.6%)|
|Murphy Oil (MUR -6.07%)||(13.5%)||(71.4%)|
|Noble Energy (NBL)||(13.6%)||(67.9%)|
|Vermilion Energy (VET -5.14%)||(16.4%)||(78.5%)|
Oil market news has been dominated in recent weeks by the abrupt turn from OPEC's plan to stabilize global oil markets to an all-out crude oil price war. Today, the stakes have been raised, with the United Arab Emirates announcing it would increase oil production. If that weren't enough bad news, Saudi Aramco, the state-controlled oil company that controls a vast amount of global supplies, said it would raise production to 13 million barrels per day in April.
As a result of this news, crude oil prices are falling sharply yet again, eroding the already-dismal prospects for independent oil producers even further. Both Brent and West Texas crude futures are down almost 3% at this writing, with Brent at $36.41 per barrel and West Texas Intermediate at $33.48. Both have fallen by almost half from 2020 highs in early January.
This is upending the oil and gas industry in a major way, with repercussions that will affect the entire energy sector, not just oil producers. But with that said, independent oil producers like the ones above are directly in the line of fire of OPEC's price war. With prices now well below the $50-per-barrel level that many oil companies have used as their baseline for the year, investors should expect to see every company above start cutting both capital and operating expenses very soon.
Diamondback Energy has already announced cuts, immediately reducing the number of well-completion crews by 33% and planning to idle three drilling rigs before month-end. But that's likely to prove just the tip of the iceberg across the sector; the stark reality is that few independent oil producers have the balance sheets to survive sub-$50 oil for very long without slashing their spending budgets.
The math gets even worse when crude is below $40 per barrel, and it's possible it will stay at these levels for some time to come. OPEC -- particularly Saudi Arabia -- has pricing power and government backing that small, debt-laden independent oil producers simply cannot match. For that reason, investors would do well to sit on their hands for the time being.
There will be some huge winners from the bottom of this global oil price war, but until the dust settles and we have at least some idea how protracted things will be and which companies have the best prospects to come out the other side, now probably isn't the time to buy oil producer stocks.