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4 Oil Producer Stocks Crashing While the Market Is Up

By Jason Hall - Mar 30, 2020 at 2:04PM

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Saudi Arabia is holding firm on plans to flood global markets and drown out weaker producers.

What happened?

Oil stocks have been having another bad day on March 30. While the S&P 500 index is up 2.6% as of 1:01 p.m. EDT, many companies involved in the oil and gas industry are seeing their stocks fall sharply. Independent oil and gas producers in particular are taking it hard.

Here are four notable producers seeing their stocks down sharply today:

Oil stock Subsector Price change on 3/30*
Chesapeake Energy Corporation (CHKA.Q) Independent oil & gas producer (6%)
Continental Resources, Inc. (CLR 0.06%) Independent oil & gas producer (13.2%)
Antero Resources Corp (AR -0.12%) Independent oil & gas producer (12.1%)
WPX Energy Inc (WPX) Independent oil & gas producer  (17.5%)

*As of 1:01 p.m. EDT Source: Yahoo! Finance.

So what

Oil stocks are falling today along with crude oil. At this writing, Brent crude futures have shed another 10% to $22.56 per barrel, pushing West Texas Intermediate down another 5% to $20.44. 

Today's oil sell-off is the result of news that Saudi Arabia isn't slowing down in its plans to completely alter the global oil landscape. Three weeks ago, the country, which controls the largest, cheapest oil reserves on earth, abruptly shifted direction, moving from years of market-stabilizing cuts to an all-out war on both Russia and what has become more apparent: U.S. shale production. 

Oil or gas pumpjack in motion.

Image source: Getty Images.

Over the weekend, the country said that, on top of its plans to surge oil exports to 10 million barrels per day in April -- a massive 43% increase from January and February -- it would grow those exports by an additional 600,000 barrels per day in May. 

It's become clear that Saudi Arabia's intent isn't just to force Russia -- which had been an active partner in the OPEC+ groups efforts to stabilize global oil prices over the past several years -- to come back to the negotiating table and cut its output. 

This is a double-whammy for oil prices, as the coronavirus outbreak has already had a massive impact on global oil demand. The huge reductions in air travel, global trade, and automobile travel as hundreds of millions of people have stopped commuting are expected to reduce global oil demand by as much as 20 million barrels per day. 

That's the equivalent of all of Russia and Saudi Arabia's production, before the two countries start pumping more oil in April. 

Now what

At this point, U.S. independent oil and gas producers look like by far the highest-risk investment in not just the energy sector, but the entire stock market. The financial reality is, Saudi Arabia can produce oil for less than $10 per barrel, while most shale producers' production costs are well above $30; when you factor in debt servicing costs, very few can make money with oil below $40 per barrel. Nobody's making money at $20. 

I expect we could see bankruptcies in the oil patch within the next couple of months, as the most leveraged producers run out of cash and tap out their credit facilities. Others that have already drilled a large number of uncompleted wells they can bring online -- meaning they've already spent much of the cost of that well -- can stave off a liquidity crunch longer, but invariably, a substantial number of U.S. shale oil producers are likely going to go out of business. 

The bottom line is, this move has every appearance of a Saudi Arabia that's prepared to drown out every competitor it can, and has the pricing power to do it. The opportunity to add so much oil to a demand environment that's in sharp decline will probably make it happen even more quickly.

Consumers will win at the gas pump -- when we actually start needing to fill up on a regular basis again. But hundreds of thousands of Americans will likely lose their jobs as we see producers reach insolvency in the months ahead. Investors would do best to avoid this subsector -- along with any of the suppliers that make a living supporting the shale patch -- for the foreseeable future. It's going to get worse before it gets better. 

Jason Hall 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

Chesapeake Energy Corporation Stock Quote
Chesapeake Energy Corporation
CHKA.Q
Continental Resources, Inc. Stock Quote
Continental Resources, Inc.
CLR
$68.61 (0.06%) $0.04
WPX Energy, Inc. Stock Quote
WPX Energy, Inc.
WPX
Antero Resources Corporation Stock Quote
Antero Resources Corporation
AR
$40.26 (-0.12%) $0.05

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

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