What happened
Shares of relatively tiny oil driller SM Energy (SM +3.80%) jumped nearly 14% in the first half hour of trading on July 21. Following close behind were Canadian international oil company Vermilion Energy (VET +3.80%) and U.S.-based giant Occidental Petroleum (OXY +1.19%), both of which were up around 10%. The big news is that oil prices were in rally mode. That said, the previous day's news that Chevron had agreed to buy Noble Energy probably helped the mood some, too.
So what
Oil prices are still hovering at a level that makes it hard for oil companies to turn a profit. So any price rally needs to be taken with a grain of salt. There's only just so much that a gain of a few percentage points will do. What oil companies really need is a sustained rally, which will require a material rebalancing of supply and demand. Right now, thanks to COVID-19, supply is outstripping demand by a notable margin, especially when you consider all the oil that has been put into storage. That extra energy needs to be worked off before oil is likely to see a material price advance.
Image source: Getty Images.
However, that doesn't mean that investors won't get caught up in oil price moves and other industry news. In fact, there's good reason for positive developments to have a material impact on some drillers. Occidental Petroleum, for example, won a bidding war for Anadarko Petroleum in 2019, beating out Chevron. Unfortunately, that $55 billion acquisition saddled the company with debt that, when oil prices fell in 2020, left Occidental struggling to carry the load. Higher oil prices will make it easier for the $16 billion market cap company to deal with all the debt it took on, so investors are right to see higher energy prices as a positive here.
SM Energy, meanwhile, is fairly small with just a $450 million market cap. That said, the U.S.-focused exploration and production company is carrying around $2.6 billion in long-term debt. Its financial debt-to-equity ratio is roughly 19 times. Although the company didn't make a headline-grabbing acquisition like Occidental, debt is still a very big issue. And higher oil prices can only help.
Vermilion is a Canadian driller with assets scattered around the world. Like the two names above, it's carrying a notable debt load. While its situation isn't nearly as bad as the one SM Energy is in, the $750 million market cap company's $1.4 billion in long-term debt is still pretty onerous. Financial debt to equity is around 2.9 times. What's notable here is that Vermilion had long been a reliable dividend payer, but it suspended its dividend in April because of the impact of the global pandemic. That was a material blow to dividend-focused investors who had come to rely on the monthly dividend payment Vermilion previously offered. Getting that dividend back will depend on oil prices moving higher again.
Now what
One day doesn't really change much in the big picture, and Occidental, SM Energy, and Vermilion remain materially below their early-year highs. These companies are all dealing with sizable headwinds that continue to hamper their financial results. Until there's a sustained uptrend, they remain fairly risky options in the energy patch. Indeed, investors should probably expect continued volatility for the foreseeable future, since oil has a long history of swift and dramatic price swings -- sometimes shifting gears on a day-to-day basis.
