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These Oil Stocks Are Crashing After Yesterday's Big Rise

By Tyler Crowe - Updated Jun 9, 2020 at 1:12PM

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Yesterday's near-euphoric rally sent some oil stocks soaring, but today is a sobering reminder of the realities of the market.

What happened

Yesterday was a big day for a lot of oil and gas stocks, especially those that have seen their stock prices crater lately. Many of those same stocks are giving back many of those gains today, though, as prices remain low. Several of the oil services companies and rig operators are among the biggest losers today thus far. Here is a list of several oil stocks that are seeing big declines as of 11:30 a.m. EDT. 

Company Price Change
Transocean (RIG 0.29%)  (17.7%)
Borr Drilling (BORR 3.53%) (26.6%)
Valaris (VAL) (25.8%)
Nabors Industries (NBR -0.19%) (11%)
Noble Corporation (NEBLQ) (26.6%)

So what

Yesterday's big price rally came after an OPEC+ -- the plus means all OPEC members and Russia -- announcement over the weekend that it was going to continue with its steep production cuts for some time to try to balance the supply going to market. The swift drop in oil demand as part of the coronavirus response has left the market incredibly oversupplied and inventories of crude oil and refined products are all incredibly high right now.

An offshore oil rig on the horizon at sunset.

Image source: Getty Images.

Despite the news, though, crude oil prices are on the decline today. A barrel of Brent crude is down 0.66% to $40.53 per barrel and U.S. domestic crude West Texas Intermediate is down to $38.00 per barrel. These prices are above what they were a little over a month ago, when oil was trading in the low teens and even went negative during a trading day, but they are still down more than 60% compared to this time last year.

Now what

Oil prices are improving, but there is a difference between improving and good. At prices like today's, a few of the world's lowest-cost sources may be able to squeeze out a modest profit, but higher-cost sources like shale and offshore are still unprofitable. What's more, with prices this low and producer capital spending budgets cut to the bone, there isn't much appetite to drill new wells or explore for new sources.

This is what is important for all the companies mentioned above. Transocean, Borr, Valaris, and Noble are all offshore rig owners that count on exploration and development budgets to generate revenue. All of these companies have idle equipment and a limited amount of actively working offshore rigs. Those few contracts simply aren't enough to pay the bills. All of these companies have been posting significant losses, and their cash balances have been dwindling. 

RIG Net Income (TTM) Chart

RIG Net Income (TTM) data by YCharts

Without a significant turnaround in prices and producer appetite to spend on new oil sources, these trends aren't likely to change. 

Nabors is the only company on this list that owns land rigs, but it isn't in a much better position. It's likely going to be drilling onshore and tapping shale wells sooner than it will be developing offshore sources, but the company's balance sheet is also looking incredibly strained, and a turnaround isn't expected for at least a couple more months. 

Today's price changes are yet another reminder that this is an incredibly volatile market that at times seems completely out of whack with the supply-and-demand situation. Many of the companies mentioned here are likely on the precipice of bankruptcy, so investors are probably better off staying away from these stocks.

Tyler Crowe owns shares of Transocean. 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

Transocean Ltd. Stock Quote
Transocean Ltd.
$3.45 (0.29%) $0.01
Noble Corporation plc Stock Quote
Noble Corporation plc
Valaris plc Stock Quote
Valaris plc
Nabors Industries Ltd. Stock Quote
Nabors Industries Ltd.
$123.42 (-0.19%) $0.23
Borr Drilling Limited Stock Quote
Borr Drilling Limited
$4.11 (3.53%) $0.14

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

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