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Why Oil Stocks Are Slumping Today

By Matthew DiLallo – May 1, 2020 at 12:18PM

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The volatility in the oil and gas markets continues.

What happened

Oil prices were a bit weaker today. WTI, the main U.S. oil benchmark, was marginally lower at 10:45 a.m. EDT while Brent, the global benchmark, slumped more than 1%. This weakness in the oil market, as well as an overall down day in the stock market, weighed on most oil stocks today. 

A broad section of oil-related companies tumbled more than 10%. Leading the plunge were refiner PBF Energy (PBF 2.03%), gas driller Southwestern Energy (SWN 0.33%), oil driller Centennial Resource Development (CDEV 1.34%), and offshore service companies Core Laboratories (CLB -5.00%)Helix Energy Solutions (HLX -1.78%), and Oceaneering International (OII -1.73%)

Several offshore drilling rigs sitting idle in darkness.

Image source: Getty Images.

So what

For the most part, lower oil prices were the main factor driving these stocks down. Southwestern Energy did, however, have an additional downward catalyst as it reported its first-quarter results. While the gas driller posted a profit of $0.10 per share, it felt the pinch of lower oil and gas prices. The company's cash from operating activities plummeted 64% during the quarter to $160 million, while it had to record a $1.48 billion asset writedown because of low pricing. 

Meanwhile, today's overall weakness in oil prices reminded investors of the risks facing a variety of oil-related companies. Centennial Resource Development is the most directly exposed to lower prices because it produces crude oil. This year's sell-off has weighed considerably on the company's financials. Centennial had to slash its capital spending plan by 50% to conserve cash, while its banks made it hedge a considerable amount of its oil production to protect its cash flow. Even with these moves, the company's liquidity is in a tight spot. 

PBF Energy, on the other hand, would typically benefit from lower oil prices since it buys crude for its refineries. Instead, demand for refined products has cratered due to the COVID-19 outbreak. As a result, the company's margins are suffering. Analysts believe PBF Energy is the worst-positioned refiner to navigate through this turbulent period, which has put the pressure on its stock price this year. 

Finally, offshore-focused service contractors Core Labs, Helix Energy, and Oceaneering are plunging because continued weakness in Brent pricing will likely prevent oil producers from heading back offshore for quite some time. Yesterday, one of the largest offshore drilling contractors said that plans to idle several rigs because contract work had dried up. In its view, these rigs likely won't go back to work for at least two years, given how lousy market conditions are these days. This outlook suggests that service companies focused on the sector are heading into another incredibly challenging period. 

Now what

Oil prices had percolated higher over the past few days because several states are starting to reopen their economies, which will fuel demand for oil and refined products. However, there has been so much demand destruction in recent weeks that it will take the economy quite a while to burn off all the excess oil in storage. Consequently, prices will likely remain quite low for a while, which will have a major impact on the operations and financial results of oil companies. That suggests the sector has a lot of challenges ahead.

Matthew DiLallo owns shares of Core Laboratories. The Motley Fool recommends Core Laboratories and Oceaneering International. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Core Laboratories N.V. Stock Quote
Core Laboratories N.V.
$13.48 (-5.00%) $0.71
PBF Energy Inc. Stock Quote
PBF Energy Inc.
$35.16 (2.03%) $0.70
Oceaneering International, Inc. Stock Quote
Oceaneering International, Inc.
$7.96 (-1.73%) $0.14
Southwestern Energy Company Stock Quote
Southwestern Energy Company
$6.12 (0.33%) $0.02
Helix Energy Solutions Group, Inc. Stock Quote
Helix Energy Solutions Group, Inc.
$3.86 (-1.78%) $0.07
Centennial Resource Development, Inc. Stock Quote
Centennial Resource Development, Inc.
$6.80 (1.34%) $0.09

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

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