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Shale Oil Stocks Get Smashed Today by This Bad News

By Jason Hall - Apr 15, 2020 at 4:22PM

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A very bad market just got even worse.

What happened

Shares of oil producers with heavy exposure to North America's shale resources are taking it on the chin once again. Matador Resources (MTDR -2.82%)Continental Resources (CLR -0.68%)SM Energy (SM -1.34%), and Vermilion Energy (VET -2.08%) all saw their stocks close down between 4% and 17% today, with all four losing more than 10% at some point during trading. 

Shale Producer Price Change (Decline)
Matador Resources  (3.9%)
Continental Resources (8.2%)
SM Energy (9.4%)
Vermilion Energy (16.8%)

Source: Yahoo! Finance.

So what

Today's nosedive for these shale drillers came courtesy of more bad news on the storage and demand front. According to the U.S. Energy Information Administration, U.S. crude oil inventories increased by 19.2 million barrels over the past week, to a total of 503.6 million barrels. Refined fuels inventories also continue to increase, with gasoline up 5 million barrels. 

Man lighting 100 dollar bill on fire.

Image source: Getty Images.

Over the past four weeks, consumption has fallen sharply. Total products supplied fell 19% over that period, with gasoline supplied down almost 32% and jet fuel down a stunning 40%. Yet over the same period, refinery inputs only declined about 1 million barrels, or about 9%, even as demand continues to crater. 

Now what

After rebounding from 20-year lows earlier this month, crude oil futures have fallen back to prices we haven't seen since the 1990s. West Texas Intermediate futures spent much of today trading below $20 per barrel, as oil traders face down the risk of owning oil futures with no buyers to take delivery. 

The stark reality is that the economy is likely to remain in park for at least the rest of April, and likely well into May in the most-populous parts of the U.S. and around the world. That's not a good situation to be in if you're an oil producer in the U.S. We are potentially weeks away from running out of storage capacity, and shale drillers already starved for cash could face the reality of having to shut-in production (turn off producing wells) that the logistics infrastructure can't take on. 

Eventually things will improve, but it's not likely to happen before the second half of the year. Even as economic activity ramps up and oil consumption returns to growth, there will be hundreds of millions of barrels of cheap oil in storage that refiners will be able to buy at discounted rates, before there's any appetite for new production. 

MTDR Cash and Short Term Investments (Quarterly) Chart

MTDR Cash and Short Term Investments (Quarterly) data by YCharts.

Unfortunately, many shale producers don't have the capital to make it that far. None of the four producers above ended last quarter with enough cash on their balance sheets to cover even a single quarter of their average operating and capital expenditures, and banks have all but stopped extending new credit to these highly leveraged producers. And this makes sense: Most shale producers' costs are about double today's selling prices for oil, and market conditions continue to deteriorate. 

That's why all four have seen their shares lose 70% or more this year. They're all on the cusp of insolvency and may not make it through this downturn without filing for bankruptcy, or having to take action that results in massive capital destruction for shareholders. The pure-play oil producer segment is a minefield that retail investors should avoid for now. 

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

Continental Resources, Inc. Stock Quote
Continental Resources, Inc.
CLR
$67.60 (-0.68%) $0.46
SM Energy Company Stock Quote
SM Energy Company
SM
$40.41 (-1.34%) $0.55
Vermilion Energy Inc. Stock Quote
Vermilion Energy Inc.
VET
$24.05 (-2.08%) $0.51
Matador Resources Company Stock Quote
Matador Resources Company
MTDR
$56.93 (-2.82%) $-1.65

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

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