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Why Oil Stocks Are In Rally Mode Again Today

By Matthew DiLallo – May 8, 2020 at 4:11PM

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Crude oil prices are heading higher today, which was one of several catalysts fueling oil stocks.

What happened

Oil prices rose more than 4% by 2:45 p.m. EDT on Friday, which helped fuel oil stocks again. Most followed crude prices higher, with several rallying double digits, thanks in part to some additional catalysts. Leading the charge were Core Laboratories (CLB -4.17%), PBF Energy (PBF -0.10%), Gulfport Energy (GPOR)Patterson-UTI Energy (PTEN 2.30%), and Murphy Oil (MUR -3.54%).

So what

Oil prices finished a big week as today's rally pushed the U.S. oil benchmark WTI up 25% to close around $25 a barrel. One of the main factors fueling oil prices is that producers have taken significant steps to reduce their output. Oil companies have cut the number of drilling rigs operating in the country by 57% since mid-March, which, along with production cuts, should ease some of the pressure excess supply has put on oil prices.

A drilling rig surrounded by oil pumps at sunset.

Image source: Getty Images.

The significant activity slowdown would normally be bad news for service companies like Core Labs and Patterson-UTI Energy. Investors, however, think that the dramatic near-term cuts might help speed up a recovery in the oil market. That could fuel a rebound in activity levels during the second half.

In addition to the oil-fueled rally, several other factors helped drive up these oil stocks today. Murphy Oil, for example, announced that it was closing offices in Canada and Arkansas. These moves, along with a string of other recent cost-cutting initiatives, will enable Murphy to save money so that it can survive the oil market downturn.

Refiner PBF Energy, meanwhile, made a move to shore up its finances by pricing a $1 billion debt offering. The notes, due in 2025, carry a 9.25% interest rate. While that's a steep price to pay, the fact that the struggling refining company was able to raise capital was a positive sign.

Finally, natural gas-focused driller Gulfport Energy is rallying today after reporting its first-quarter results. The company posted a surprising profit despite the impact of lower commodity prices. It was able to take advantage of turbulent market conditions during this year to repurchase $73.3 million of its bonds for just $22.8 million in cash.

However, its liquidity remains tight after its banks cut the borrowing base on its credit facility to $700 million, leaving it with only $269 million of breathing room. Because of that, the company plans to keep capital spending at the low-end of its $285 million to $310 million budget range, so it doesn't drill itself any deeper into debt.

Now what

Oil prices enjoyed a bounce-back week, which helped fuel rallies in most oil stocks. However, while industry conditions appear to be improving a bit, they're still very challenging.

Companies like PBF Energy are paying a high price for capital, while others like Gulfport Energy are seeing their liquidity sources dry up. Because of that, the industry could still see a wave of bankruptcies later this year if oil prices don't keep rising.

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

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Stocks Mentioned

Core Laboratories N.V. Stock Quote
Core Laboratories N.V.
CLB
$13.33 (-4.17%) $0.58
Murphy Oil Corporation Stock Quote
Murphy Oil Corporation
MUR
$32.16 (-3.54%) $-1.18
Gulfport Energy Corporation Stock Quote
Gulfport Energy Corporation
GPOR
PBF Energy Inc. Stock Quote
PBF Energy Inc.
PBF
$29.85 (-0.10%) $0.03
Patterson-UTI Energy, Inc. Stock Quote
Patterson-UTI Energy, Inc.
PTEN
$11.11 (2.30%) $0.25

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

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