Please ensure Javascript is enabled for purposes of website accessibility

Why Core Labs, Halliburton, and Baker Hughes Shot Higher in April

By Reuben Gregg Brewer - May 5, 2020 at 3:35PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

After oil supply surged in March, investors took a more positive view in April. But this story is far from over, especially for this trio.

What happened

Shares of Baker Hughes (BKR 0.68%) rose an impressive 33% in April, according to data provided by S&P Global Market Intelligence. Halliburton (HAL -1.48%) jumped an even more incredible 53% during the month. And the value of Core Laboratories' (CLB -3.59%) stock increased by an astounding 90%. But even after these large advances, Baker Hughes is still down 46% for the year. Halliburton is off by 60%. And Core Labs is lower by 53%. There's a lot going on in the energy sector, and the turmoil is not nearly close to being over, especially for energy services companies.

So what

The big story in the oil and natural gas space is that supply has swamped demand. A combination of factors created this situation. For example, the excess supply has its roots in the long rise of U.S. onshore oil output. That output upended the normal functioning of the global energy markets, with OPEC trying to play referee to accommodate the new supply without a major price slump.

An oil well and two men writing in notebooks in the foreground

Image source: Getty Images.

The oil group cut production to offset the new output. But the more it cut, the more U.S. onshore drillers produced. Eventually OPEC and partner Russia disagreed on this approach and got into a price war. The supply spigot was opened up and oil prices plunged. That happened in early March, a disastrous month for any company related to oil.

As OPEC and Russia were getting into this tiff, COVID-19 was forcing countries around the world to effectively shutter their economies. The goal was to slow the spread of the coronavirus by forcing people to stay at home. That effort appears to have worked, but it led to a dramatic decline in demand for oil at a time when supply was high (and increasing). Oil prices have fallen to frighteningly low levels. OPEC, Russia, and the United States have since come to terms on production cuts, but the damage has been done.

Effectively, all of the excess oil has ended up in storage. With storage around the world largely full and demand still relatively weak, oil and gas prices are likely to remain depressed for much longer. This is terrible news for energy services companies, even industry leaders like Halliburton, Baker Hughes, and Core Labs. 

The problem: The oversupply needs to be resolved before oil can start a sustained rebound. As economies open up again, demand will slowly come back. But that alone won't be enough. Low energy prices are leading to a massive pullback on capital spending by exploration and production companies. Some smaller players are even going bankrupt. It's actually a healthy clearing process for the energy industry as a whole, even if it's a painful one. But it means demand for energy services is not only weak, but likely to get even weaker in the near term. Energy industry Goliaths ExxonMobil and Chevron, for example, have each announced plans to trim capital spending by 30%. They aren't alone.   

BKR Chart

BKR data by YCharts.

The spending cuts aren't impacting just onshore U.S. drilling. The effects are reaching offshore drilling, traditional onshore projects, natural gas, and fracking. Even spending in the midstream (pipeline) sector is getting upended. With a broad spending pullback, the entire spectrum of energy services are going to continue to feel the pain. Energy services companies are making changes, cutting costs and laying off staff, for example, but that effort will take time, and it doesn't really solve the demand decline -- it just makes it easier to muddle through the tough times.   

Now what

When oil companies pull back, energy services firms tend to get hit extra hard. That's exactly what's going on today. Although market sentiment improved overall in April, after a terrible March, investors shouldn't read too much into the stock price gains at Halliburton, Baker Hughes, and Core Labs. The energy services space is in for more pain before business starts to pick up again. It all goes back to the supply-demand imbalance in the energy markets. Until that's cleaned up, this trio will be facing material headwinds.

Reuben Gregg Brewer owns shares of ExxonMobil. The Motley Fool recommends Core Laboratories. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Core Laboratories N.V. Stock Quote
Core Laboratories N.V.
CLB
$16.37 (-3.59%) $0.61
Halliburton Company Stock Quote
Halliburton Company
HAL
$29.39 (-1.48%) $0.44
Baker Hughes, a GE company Stock Quote
Baker Hughes, a GE company
BKR
$25.16 (0.68%) $0.17

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
397%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.