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Why Shares of Shell and Chesapeake Tanked on 4/30, but Matador Rallied

By Reuben Gregg Brewer - Apr 30, 2020 at 11:55AM

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Energy companies like Shell and Chesapeake Energy nosedived at the open on bad news, while news pushed Matador in a different direction.

What happened

Shares of Royal Dutch Shell (RDS.B) (RDS.A) fell dramatically at the open of trading on April 30, dropping as much as 14% in the first half hour. Chesapeake Energy's (CHKA.Q) performance was even worse, declining nearly 20%. And then there was relatively small energy producer Matador Resources (MTDR 0.88%), which saw its shares rise as much as 12%. And in each case the dramatic stock moves were related to news flow, only this time around the news wasn't directly related to the ups and downs of oil prices.

So what

Royal Dutch Shell's news was probably the hardest to bear, especially if you are a dividend investor. The European energy giant announced overnight that it was trimming its dividend from $0.94 per American depositary receipt (effectively its U.S. listed shares, each equal to two "ordinary shares") per quarter to $0.32, a 66% cut. Although the move shouldn't have been a total surprise, given the painfully low price of oil and natural gas in the world today, it obviously upset investors. And the stock duly sold off.   

A pair of hands stained with oil

Image source: Getty Images.

After a long time supporting the dividend, even through difficult periods, management found the current environment too uncertain. Shell's first-quarter earnings help explain why, since the company's bottom line went, effectively, to zero in the quarter. It didn't exactly lose money (on a per-share basis, because net income was just slightly in the red), which is something. But it also didn't make any money. With a relatively high debt load and a still-oversupplied energy market, Shell decided it was time to conserve cash.    

Interestingly, rivals Chevron (CVX 0.14%) and ExxonMobil (XOM 0.87%) both recently announced that they would maintain their dividends and, as you might expect, didn't suffer the same negative shareholder reaction. A pullback in the price of oil led their shares to decline around 3.5% each in early trading today, but that's nothing like the pain that Shell shareholders endured. Unlike their European counterpart, Chevron and Exxon have long focused on carrying very modest levels of long-term debt. At this point they appear better able to lean on their balance sheets (Exxon has issued around $18 billion of debt this year) to sustain capital spending plans and dividends.  

RDS.B Chart

RDS.B data by YCharts

Chesapeake Energy is a completely different story. It has been attempting to simply stay alive, taking what most would view as desperate steps to protect itself. Those have included announcing plans for a massive reverse stock split and adopting a poison pill to ward off would-be acquirers. But now Reuters is reporting that the exploration and production company is in talks with lenders for a loan, perhaps as large as $1 billion, that would allow it to work through a bankruptcy process. Investors are, as you might expect, fleeing what looks like a sinking ship. And thus the stock fell steeply at the open. However, Chesapeake has been struggling for some time, so this isn't exactly shocking news.   

And then there's Matador Resources, which was up sharply in early trading. This relatively small driller reported earnings that were, largely, pretty positive. Hedging activities allowed the company to earn $1.08 per share in the quarter. Even without the hedging gains, it still managed to earn $0.20 per share. That was down 50% from the fourth quarter because of lower oil and gas prices, but the company managed to stay soundly in the black and beat Wall Street's expectations. It also highlighted that it has roughly 90% of its output hedged at prices between $35 and $48 per barrel through the remainder of the year. Investors were obviously pleased with the results and appear to believe Matador can hold up reasonably well even in the face of low oil prices.   

Now what

The energy industry is extremely volatile right now, and it's hard to tell which way the broader sector will move on any given day. It gets even more complex when you drill down to the individual names. However, if you are attracted to the space in search of unloved stocks, strongly consider sticking with large, financially strong companies. Now is not the time for most investors to take risky bets in the oil patch.

Reuben Gregg Brewer owns shares of ExxonMobil. 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

Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
RDS.A
Chesapeake Energy Corporation Stock Quote
Chesapeake Energy Corporation
CHKA.Q
Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
RDS.B
Matador Resources Company Stock Quote
Matador Resources Company
MTDR
$60.78 (0.88%) $0.53
Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
XOM
$94.00 (0.87%) $0.81
Chevron Corporation Stock Quote
Chevron Corporation
CVX
$159.85 (0.14%) $0.23

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