What happened

It almost seems too good to be true. Shares of hard-hit oil and gas exploration and production companies (E&Ps) Callon Petroleum (NYSE:CPE)Diamondback Energy (NASDAQ:FANG), and EOG Resources (NYSE:EOG) soared in April, according to data provided by S&P Global Market Intelligence. EOG's shares were up 32.3%, Diamondback's shares jumped 66.2%, and Callon's shares rocketed up 71.5% during the month.

But if it seems too good to be true, it probably is. Those gains did little to offset the companies' overall 2020 losses. Year to date, EOG shares are down 38.3%, Diamondback's shares are down 54.4%, and Callon's stock has fallen a jaw-dropping 83.3%. Meanwhile, the S&P 500 is only down 9.3% so far this year.

An oil well in a large, barren field

Image source: Getty Images.

So what

Callon, Diamondback, and EOG were all hit hard by March's 50% drop in oil prices. Between March 1, before oil prices fell, and March 18, when most oil stocks bottomed out, all three stocks lost more than half their value. 

The hardest-hit of the lot, Callon -- shares of which were down 81% between March 1 and 18 -- had recently racked up big debts through its purchase of fellow Texas shale oil driller Carrizo. With $3.2 billion in long-term debt and just $13.3 million in cash on its balance sheet, Callon looked like a very risky bet.

Meanwhile, Diamondback Energy was experiencing a timing issue of its own. In 2019, the oil producer had nearly doubled its dividend to $0.375/share. It, too had racked up a high debt load ($5.4 billion), with a comparatively small cash position ($149 million). With the collapse in oil prices, that freshly increased dividend looked increasingly at risk. Callon, at least, didn't have a dividend to potentially suspend.

Compared to Callon and Diamondback, EOG Resources was actually in decent shape. It did have $5.2 billion in debt on its books, but that was offset somewhat by a fairly sizable $2.9 billion cash hoard. EOG, though, is still primarily a U.S. shale driller: 93.6% of its 2019 production came from U.S. shale basins. With shale drilling one of the most expensive ways to produce oil, EOG was expected to be forced to operate at a loss at sub-$20 WTI Crude prices, just like Callon and Diamondback. 

Sure enough, all three companies subsequently announced plans to cut their rig counts, production, and 2020 capital spending.

Now what

The companies' shares rebounded from their March lows as it became clear to investors that:

  • None of the three seemed likely to declare bankruptcy.
  • WTI Crude prices were rebounding from their record lows.
  • Diamondback and EOG were unlikely to cut their dividends...at least for now. 

Callon saw the largest percentage gain, but investors have to remember that the company's share price is currently lower than $1/share. A recent debt exchange offering has reignited concerns about the company's overall debt load in the face of a prolonged period of low oil prices. 

Diamondback's debt is still a concern as well. The company believes that, through the use of hedges and existing pipeline contracts, it can make it through the end of the year without having to cut its dividend. But those hedges will expire eventually, at which point Diamondback will still be a heavily indebted company in a lackluster market. 

EOG -- the largest and most stable company of the group -- claims to have identified some 4,500 future wells that it believes can be profitable at $30/barrel oil. However, the company just posted terrible Q1 numbers, missing earnings estimates by 97%. That should worry investors. 

In short, U.S. shale is still a risky and unprofitable place to be, regardless of how much shale producers' stocks have fallen or risen last month. Energy investors would probably be better off looking elsewhere.

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.