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Why Energy Stocks Are Bouncing Back Today

By Matthew DiLallo - Mar 20, 2020 at 1:55PM

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The volatility in the energy markets continues.

What happened

Oil prices have endured historic volatility this month. They've suffered two of their worst plunges on record, including nosediving to their lowest level since 2002 a few days ago. Meanwhile, crude prices delivered their biggest rally ever on Thursday, before giving back some of those gains today. At 1:30 p.m. EDT, the U.S. oil benchmark, WTI, had fallen about 6% to less than $24 a barrel. 

Usually, falling oil prices would drive down energy stocks. But many are rallying again today, including ONEOK (OKE -1.60%)Holly Energy Partners (HEP -1.54%)Williams Companies (WMB 0.43%), and Sunoco (SUN -0.47%), which had all jumped by more than 20% at one point in the trading day. 

An oil storage complex with pipelines.

Image source: Getty Images.

So what

Bargain hunting seems to be driving today's rally as investors are picking up shares of badly beaten-down stocks. Pipeline giant ONEOK, for example, has shed a stunning 70% of its value in the past few weeks as investors have sold off anything energy related. But the company doesn't currently anticipate the slump in the oil market to have much effect on its earnings this year since fee-based contracts supply more than 90% of its income. It has already reaffirmed its 2020 outlook, which would see its earnings jump 25% due to recently completed expansion projects. The only change has been that ONEOK deferred about $500 million in investments on recently approved expansion projects. 

Fellow pipeline giant Williams likewise has fee-based agreements underpinning the bulk of its revenue, which helps insulate it from the current downdraft in commodity prices. It also boasts a strong balance sheet and has ample liquidity to get it through these market conditions. Because of that, it believes it can weather this storm. Instead, its biggest concern right now is that the 50% plunge in its stock price will lead an outside party to try to gain control of the company. That led it to adopt a shareholder rights plan, also known as a poison pill, which would prevent an outsider from gaining control of the company by purchasing lots of shares at a discounted price. This plan would allow existing shareholders to buy stock so that they could dilute the value enough to prevent someone else from gaining control of their company. 

The share prices of logistics companies Holly Energy Partners and Sunoco have tumbled more than 40% due to the plunge in oil prices. While they don't produce any oil, they do transport and distribute refined petroleum products. Because of that, their businesses have some insulation against the current market because they also get paid fixed fees to provide their services. But with demand for refined products falling off a cliff as governments force people to stay home, they won't transport as much volume as anticipated, which will impact their income. That has investors worried that these companies might have to reduce their dividends. Bargain hunters, however, likely think that their stocks might have fallen too sharply even after accounting for the anticipated decline in their income and dividends, which appears to be what's fueling today's rally.

Now what

The volatility in the energy sector continued today as shares of several companies are rebounding even though crude prices have given back some of Thursday's gains. These wild swings will likely continue for some time since it's not yet clear when things will get back to some sense of normal. Because of that, these stocks will probably give back some of today's gains on the next down day. 

Longer term, however, pipeline giants ONEOK and Williams Companies should do well thanks to their strong balance sheets and stable revenue sources. There is a bit more concern with Sunoco and Holly Energy Partners since both entered this turbulent period with weaker financial profiles. Because of that, those two companies are more likely to reduce their dividends if industry conditions don't bounce back quickly.

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Stocks Mentioned

The Williams Companies, Inc. Stock Quote
The Williams Companies, Inc.
WMB
$35.38 (0.43%) $0.15
ONEOK, Inc. Stock Quote
ONEOK, Inc.
OKE
$63.75 (-1.60%) $-1.04
Holly Energy Partners, L.P. Stock Quote
Holly Energy Partners, L.P.
HEP
$17.14 (-1.54%) $0.27
Sunoco LP Stock Quote
Sunoco LP
SUN
$40.05 (-0.47%) $0.19

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

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