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Energy Companies are Slashing Spending: Stocks to Avoid

By Lee Samaha - Apr 1, 2020 at 8:04AM

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The tumbling price of oil is putting oil services companies under threat, and will also affect many industrials.

The crash in the price of oil hasn't been the headline news that it might have been if the COVID-19 pandemic hadn't been front and center of attention. However, that shouldn't detract from how serious the impact is likely to be in one of the most important industry verticals in the industrial sector.

Oil and gas companies are significantly lowering their capital spending, and this is inevitably going to affect the beleaguered industrial sector, and in particular, stocks like Apergy (APY), Emerson Electric (EMR -0.40%)and industrial supply companies like MSC Industrial (MSM 0.30%).

Oil barrels.

Image source: Getty Images.

Major oil companies' capital spending plans

As the chart below shows, the slump in the price of oil in 2014 to 2016 caused significant cutbacks in capital spending, and it wasn't until 2017 that major oil companies started increasing spending again.

WTI Crude Oil Spot Price Chart

WTI Crude Oil Spot Price data by YCharts

Leading into 2020, there was hope that a combination of the relative stability in the price of oil and a natural replacement demand would lead to ongoing growth. Unfortunately, just a few months into 2020 and with the price down to around $20 a barrel, the major oil and gas companies have taken the knife to the spending plans they made just a couple of months ago.

Here are the updated plans from the five largest oil stocks in the U.S., plus the two major British oil companies.

Company

Capital expenditure guidance change/commentary

ExxonMobil

"evaluating all appropriate steps to significantly reduce capital and operating expenses in the near term" 

Chevron

Cut to $16 billion from previous guidance of $20 billion 

ConocoPhillips

Cut to $5.8 billion-$6 billion from a previous range of $6.5 billion-$6.7 billion 

EOG Resources

Cut to $4.3 billion-$4.7 billion from a previous range of $6.3 billion-$6.7 billion 

Occidental Petroleum

Cut to $2.7 billion-$2.9 billion from a previous range of $5.2 billion -5.4 billion 

Shell

Cut to $20 billion from previous guidance of $25 billion 

BP

Could cut capex by 20% in 2020 according to Bloomberg article

Data source: Company presentations.

The cuts outlined above approximate to roughly a 25% cut in capital spending plans for 2020. That's obviously bad news for the oil services companies, and their stock prices have slumped accordingly.

WTI Crude Oil Spot Price Chart

WTI Crude Oil Spot Price data by YCharts

Industrial companies will also get hit

On top of the obvious candidates (oil services companies), there's also a secondary impact on the industrial companies that service and supply the oil industry and connected heavy industries. In fact, these industries were so badly hit in 2015 to 2016 that, for the first time ever, U.S. industrial production went into a recession without the overall economy being in recession.

US Industrial Production Index Chart

US Industrial Production Index data by YCharts

Emerson Electric

The consequences will be felt across the industrial sector, and it's likely that energy-related companies will delay or shelve major projects. Unfortunately, this is likely to hit process automation companies like Emerson Electric. The company has already seen delays in projects toward the end of 2019, but with the slump in energy prices, it's hard not to think that some of its major energy customers won't shelve some large projects altogether. 

For reference, Emerson's underlying sales decreased 2% in 2015 and 6% in 2016, with particular weakness in oil and gas-related spending -- not a good omen for 2020. 

Apergy

Drilling and production technology company Apergy is another obvious choice for a company that's likely to get hit hard in 2020.

Indeed, management recently announced it would reduce headcount, cut salaries, and cut its own capital spending plans by some $50 million. It's not the ideal environment to be engaging in a merger with another company tied to the upstream oil and gas industry -- in this case Ecolab's ChampionX business.

MSC Industrial

The impact doesn't stop at the heavy industries companies that service the energy industry, because if there's slowdown in their manufacturing activity, then it will be felt by their customers too.

In this context, MSC Industrial looks set to take a hit. Going back to the 2015 to 2016 period, the company's revenue growth and operating margin declined due to its exposure to heavy industries customers servicing the energy industry. It's fair to expect more of the same this year given the cut in capital spending plans from the oil and gas companies at the top of the pyramid.

MSM Revenue (TTM) Chart

MSM Revenue (TTM) data by YCharts

A difficult 2020

All told, it's likely to be a very difficult 2020 for all these companies, and until the demand environment (economic activity is dropping thanks to actions taken to deal with the COVID-19 pandemic) or the supply environment (Russia and Saudi Arabia are in disagreement over production cuts) improves, then the outlook is going to continue to be negative -- and Emerson Electric, Apergy, and MSC Industrial earnings continue to be under pressure.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool owns shares of MSC Industrial Direct. The Motley Fool recommends Ecolab. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Emerson Electric Co. Stock Quote
Emerson Electric Co.
EMR
$90.03 (-0.40%) $0.36
MSC Industrial Direct Co., Inc. Stock Quote
MSC Industrial Direct Co., Inc.
MSM
$82.32 (0.30%) $0.25
ChampionX Corporation Stock Quote
ChampionX Corporation
APY
BP p.l.c. Stock Quote
BP p.l.c.
BP
$30.16 (1.69%) $0.50
Chevron Corporation Stock Quote
Chevron Corporation
CVX
$153.41 (-0.15%) $0.23
Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
XOM
$88.95 (0.56%) $0.50
Transocean Ltd. Stock Quote
Transocean Ltd.
RIG
$3.45 (0.29%) $0.01
Schlumberger Limited Stock Quote
Schlumberger Limited
SLB
$34.65 (-0.03%) $0.01
Baker Hughes Incorporated Stock Quote
Baker Hughes Incorporated
BHI
EOG Resources, Inc. Stock Quote
EOG Resources, Inc.
EOG
$107.19 (0.17%) $0.18
Halliburton Company Stock Quote
Halliburton Company
HAL
$28.00 (0.76%) $0.21
Occidental Petroleum Corporation Stock Quote
Occidental Petroleum Corporation
OXY
$60.04 (1.75%) $1.03
Nabors Industries Ltd. Stock Quote
Nabors Industries Ltd.
NBR
$123.42 (-0.19%) $0.23
Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
RDSA
Ecolab Inc. Stock Quote
Ecolab Inc.
ECL
$164.71 (-1.07%) $-1.79

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