What happened

Shares of oil companies Devon Energy (NYSE:DVN)Continental Resources (NYSE:CLR), and Apache (NASDAQ:APA) rose more than 80% in April, according to data provided by S&P Global Market Intelligence.

Devon's shares were up 80.5% during the month, to $12.47/share. Meanwhile, Continental's share price more than doubled, up 114% to close the month at $16.39/share. Apache, the big winner, saw its shares more than triple in value, up 212.9% to $13.08/share. Shares of all three companies have retreated in May, as concerns about a global oil oversupply and lack of available storage weigh on oil markets. 

A time-lapse photo of an oil and gas well.

Image source: Getty Images.

So what

For investors who bought in after the oil price crash of early March, these three oil producers have delivered handsome returns. For just about everybody else, though, Devon, Continental, and Apache have been major underperformers. So far in 2020, all three stocks have lost more than 50% of their value. Over the last five years, for example, Continental's shares are down 72.3%, while both Apache's and Devon's shares are down a jaw-dropping 82.8%. 

There's a reason for the investor pessimism. All three of the companies have heavily invested in U.S. shale oil production. Apache, which has production operations in the North Sea and Egypt, picked up a massive shale play in the West Texas Delaware Basin and has spent heavily in recent years on necessary infrastructure for the site. Continental Resources exclusively produces shale oil from two places: the Bakken Shale of Montana and the Dakotas, and the SCOOP/STACK shale play in Oklahoma. Devon is also a pure play on U.S. shale production, with operations in the Delaware Basin, Wyoming's Powder River Basin, Oklahoma's Anadarko Basin, and Texas's Eagle Ford Shale. 

Shale oil is comparatively expensive to produce, due to the technology involved -- including hydraulic fracturing ("fracking") and horizontal drilling -- and the fact that shale wells are depleted faster than conventional oil wells, requiring new wells to be drilled at a faster pace. For most shale production to be profitable, oil prices need to be at least $50/barrel and even more in some cases. 

When per-barrel oil prices collapsed into the $20s in early March, and then plunged into the teens later in the month, shale producers that had spent years trying to boost production as much as possible now found themselves pumping oil that was going to sell at a steep loss. Apache, Continental, and Devon took drastic action to shore up their finances.

Apache announced it was cancelling all its U.S. shale operations immediately, and slashed its dividend by 90% and its projected 2020 capital spending by about 36.8%. Continental went a step further, cutting its 2020 capital expenditures budget by 55%, suspending its dividend altogether, and cutting its total rig count from 19.5 to 7. Devon split the difference with a 45% cut to its initial 2020 capital spending estimate but left its dividend intact. However, it announced it was cancelling all of its operations except in the Delaware Basin. 

Given the cratering oil prices, the financial cuts, and the uncertain outlook, it's no wonder that share prices of all three companies started April in the single digits.

APA Chart

All three companies' shares fell in March, starting April at sub-$8 share prices. APA data by YCharts.

Now what

Throughout April, U.S. oil prices remained volatile -- even turning negative at one point -- but investor sentiment improved. A new OPEC+ deal was forged that included 9.7 million barrels/day in production cuts. The U.S. and other countries began taking tentative steps toward reopening their economies. Share prices across the oil industry improved, and naturally, those that had fallen the furthest -- shale drillers -- had the most room to recover.

But even though shares of these three companies have recovered somewhat, they're not out of the woods yet. Global oil production is still outstripping demand, even with the OPEC+ cuts factored in. That's causing a storage crunch, which is impacting the markets and keeping oil prices low. Meanwhile, although oil prices have recovered somewhat, oil prices are still too low for producers like Apache, Devon, and Continental to turn a profit on their operations, which leaves them relying on tricks like hedging, price swaps, and debt to stay afloat. 

It's not a sustainable situation, which is why even though these companies' share prices skyrocketed in April, investors should probably avoid them for now. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.