What happened

Shares of energy services company Core Laboratories (CLB) fell a dramatic 61.5% in March, according to data from S&P Global Market Intelligence. Peer Helmerich & Payne (HP 0.41%) dropped 58%, with National Oilwell Varco (NOV -0.83%) declining roughly 48%. These are terrifying declines on an absolute basis when you consider they transpired over just a single month.

A man with a notebook in front of oil well

Image source: Getty Images

That said, they appear even worse when you compare the declines to the broader market. Yes, the S&P 500 fell into a bear market in March, but by the end of the span, it was down "only" around 13%. That's not good, but it is much better than the losses experienced by these energy services names. Wall Street is a volatile place today (the S&P actually bounced 20% higher from its lows in March, which some would argue means a bull market started), but there's much more to the story in the oil patch. And that has big implications for Core Labs, Helmerich & Payne, and National Oilwell Varco.

So what

The broader market sell-off was related to concerns about COVID-19. That obviously had some impact on the stock prices of Core Labs, Helmerich & Payne, and National Oilwell Varco. But the bigger impact on these companies is more complicated.

Over the last decade or so, U.S. onshore drilling has materially increased the amount of oil and natural gas the country produces. That has increased global supply and upended the normal dynamics of the world's energy markets. OPEC has tried to offset the increase in U.S. production by trimming its own output. But U.S. oil has basically just filled the void. Supply in the energy sector has been high, and that has kept a lid on oil prices.

The efforts to slow the spread of COVID-19, meanwhile, have basically involved a drastic reduction in economic activity. It is highly likely that the steps, including social distancing, limiting travel, and closing nonessential businesses, will push the world into a recession. Demand for oil and natural gas has already fallen dramatically because of COVID-19; a recession would only make things worse.

Layered on top of this, OPEC and Russia have gotten into a price war. The fear is that these major global oil producers will open the spigots and flood the market with oil when supply is already high and demand low. Material price declines are the immediate impact, but the pain could linger as the excess oil being produced today gets put into storage for use later. The stored oil will have to be worked off before oil prices are likely to start a material recovery. 

This is an uncertain time, and oil prices remain highly volatile and driven by news, both good and bad. For example, oil prices rallied on news that OPEC and Russia were going to start talking again. And just a day or so later, prices fell when it appeared that the two were still at odds over key issues and had delayed a proposed meeting. As oil prices bounce up and down, the prices of energy stocks like National Oilwell Varco, Core Labs, and Helmerich & Payne bounce, too. That's not going to change anytime soon, with often-dramatic price moves likely to be the norm.

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That said, these companies provide services to the producers of oil and gas. So their financial results aren't directly driven by oil prices. The demand for drilling services is what is most important. Oil producers were already pulling back before COVID-19 and the OPEC-Russia spat. And now, as energy prices fall to painfully low levels, they are pulling back even more. The outlook for an increase in demand for energy services, meanwhile, isn't likely to materially brighten until the supply/demand imbalance in the market has been resolved in a positive manner. And that could take a long time, considering the oil piling up in storage today. Investors may push the shares higher based on market news, but the underlying fundamentals of the business probably won't change much in the near term.

Helmerich & Payne, National Oilwell Varco, and Core Labs are all likely to survive this difficult time. But it probably won't be an enjoyable period for investors.

Now what

Those looking at the energy sector for bargains today should likely avoid Helmerich & Payne, National Oilwell Varco, and Core Labs because of the uncertainty in the market. The big problem is that their results are tied to what their customers do on the drilling front, and right now, less drilling looks likely for at least the near future. Intrepid souls trying to find value in the energy patch should probably stick to financially strong integrated energy giants like Chevron.