Please ensure Javascript is enabled for purposes of website accessibility

Why QEP Resources, Matador Resources, and Denbury Resources All Tanked Today

By Reuben Gregg Brewer - Jun 24, 2020 at 5:50PM

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

It was a terrible day for exploration and production names with onshore U.S. exposure. Here's what took place and why it matters.

What happened

Shares of onshore U.S. exploration and production (E&P) company QEP Resources (QEP) fell as much as 17% on June 24. Peers Matador Resources (MTDR 0.74%) and Denbury Resources (DNR) both declined around 14%. By 3 p.m. Wall Street time, QEP and Denbury had recouped some of their losses, and were down 14% and 10%, respectively. Matador's shares, however, were still hovering near their lowest levels, off by nearly 14% for the day. 

So what

The cause of the steep price declines at these oil and natural gas companies isn't hard to figure out -- energy prices fell sharply. West Texas Intermediate, the benchmark for U.S. oil, was off by around 6% late in the day. Since the financial results of all three of these E&P names are tied directly to the prices of the commodities they sell, the stocks logically declined. But that's just the top level here.  

Oil pumps superimposed over a stock index board.

Image source: Getty Images.

The bigger picture that drove oil prices lower was related to COVID-19. Some history is relevant. Early in 2020, oil prices fell all the way to zero because of a massive supply/demand imbalance. There were multiple factors that led to the dislocation, but the really big hit came from the worldwide economic shutdowns enacted to slow the spread of the coronavirus. With economies at a standstill, demand for energy fell off a cliff and supply swamped demand to the point where drillers were, technically, paying customers to take their oil. Meanwhile, oil and natural gas, with nowhere to go, started to pile up in storage. It was a very bad situation and energy stocks across the board fell into a deep downturn.

Today, however, economies around the world are starting to reopen, which means demand is returning. The big question now is over the shape of the recovery as businesses start up again and consumers venture outdoors. The answer isn't exactly clear yet, but one thing is for sure -- the coronavirus is not going away. In fact, countries around the world are now seeing upticks in cases as they allow more movement and business activity. China, Europe, and the U.S. (notably, early reopening states like Florida and Nevada) are all experiencing increases in coronavirus cases.

There are fears that the economic progress that's been made may have to be slowed, halted, or even reversed. In other words, demand for energy commodities might not be as strong as investors had been hoping. Energy prices fell on that news, taking the shares of drillers QEP, Matador, and Denbury along with them. 

QEP Financial Debt to Equity (Quarterly) Chart

QEP Financial Debt to Equity (Quarterly) data by YCharts.

There's two lingering negatives from here. On the commodity front, all of the oil sitting in storage will be an overhang on the market until there's more demand or there's a more dramatic and sustained decline in production.

Second, and more company specific, a lot of E&P names have heavily leveraged balance sheets. That's certainly true for QEP and Matador, which both had financial debt-to-equity ratios of around 24 times at the end of the first quarter. But it's also true of Denbury, where that metric was a far lower 3.7 times. While that sounds much better, and it is, it's still high when you compare it to a company like Chevron, which has a financial debt-to-equity ratio of a touch under 0.25 times. While it's been difficult for financially strong giants like Chevron to navigate this downturn, it's that much harder for highly leveraged names like QEP, Matador, and, to a lesser degree, Denbury.

Now what

The COVID-19 health scare is far from over, and it will continue to have material repercussions throughout the global economy. Energy prices are just one example. That said, in times of crisis, a strong financial foundation can make all the difference. QEP, Matador, and Denbury are not working off of the strongest bases. Investors should expect heightened volatility to continue here, suggesting that only the most aggressive investors should be looking at this trio.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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

Denbury Resources Inc. Stock Quote
Denbury Resources Inc.
QEP Resources, Inc. Stock Quote
QEP Resources, Inc.
Matador Resources Company Stock Quote
Matador Resources Company
$54.14 (0.74%) $0.40

*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
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/09/2022.

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.