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Why Energy Stocks Are Soaring Today

By Matthew DiLallo – May 4, 2020 at 12:13PM

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Optimism is fueling some buying in the energy sector.

What happened

Energy prices are rising today. Crude oil is moving higher, with both WTI, the U.S. benchmark, and Brent, the global benchmark, on the upswing. WTI rose nearly 2% by 10:45 a.m. EDT on Monday -- climbing back above $20 a barrel -- while Brent rose more than 1% to almost $27 a barrel. Natural gas was also moving upward, with the NYMEX price rallying more than 3% to nearly $2 per MMBtu.

Those higher prices fueled most energy stocks today. Natural gas stocks were among the biggest movers; producers Antero Resources (AR 1.42%), Gulfport Energy (GPOR), and MLP Crestwood Equity Partners (CEQP 0.96%) rose more than 10%. Meanwhile, oil-focused producer Centennial Resource Development (CDEV 6.04%) also rallied sharply on today's rebound in the energy market.

A natural gas well with pipelines at sunset.

Image source: Getty Images.

So what

Higher oil and gas prices are fueling some optimism for hard-hit producers like Antero Resources, Gulfport Energy, and Centennial Resource Development. All three companies have been under tremendous financial strain due to this year's collapse in commodity prices. Antero Resources, for example, had to slash its drilling budget by 35% to better align capital spending with expected cash flow at lower prices. It needed to make that move because it's one of several drillers that could face a liquidity crunch as banks pull back on lending to the energy sector. In addition to concerns that it might see a reduction in its credit facility, Antero has several bonds maturing over the next three years that it might not be able to refinance given all the volatility in oil and gas prices.

Centennial Resource Development is also in that group of financially stressed drillers. That led the company to slash its drilling budget by 50% earlier this year. It also had to lock in some oil price hedges to provide its banks with some confidence in its cash flows.

Gulfport Energy's financial condition has been in such dire straits that it hired advisors to help restructure its debt earlier this year. That had investors worried it might join other drillers in filing for bankruptcy.

In some ways, however, investors see the recent rebound in commodity prices as a longer-term positive for drillers, because it could provide them with cash flow. That would help ease their financial strain so that they can complete more wells in the future. Those wells would boost the volumes flowing through midstream gathering and processing systems, like those owned by Crestwood Equity Partners. It's one of the few MLPs that hasn't reduced its distribution, because it has the financial flexibility to sustain it for the time being. If commodity prices keep improving and the volumes continue flowing, it will be easier for Crestwood to maintain its current rate, which implies an eye-popping yield of 25%.

Now what

With more states slowly beginning to reopen their economies, energy demand has started rebounding, which has helped fuel higher prices. That will help bolster the cash flow of energy producers.

However, the industry remains oversupplied, which will likely keep some pressure on pricing for quite some time. Producers will continue to feel financial stress, which could eventually cause more of them to file for bankruptcy so that they can restructure their debt. That makes many energy stocks a bit of a gamble these days, since not all of them will survive this downturn.

Matthew DiLallo owns shares of Crestwood Equity Partners LP. 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

Gulfport Energy Stock Quote
Gulfport Energy
GPOR
Crestwood Equity Partners LP Stock Quote
Crestwood Equity Partners LP
CEQP
$29.55 (0.96%) $0.28
Antero Resources Stock Quote
Antero Resources
AR
$33.64 (1.42%) $0.47
Centennial Resource Development, Inc. Stock Quote
Centennial Resource Development, Inc.
CDEV
$8.60 (6.04%) $0.49

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

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