What happened
Shares of U.S. onshore energy company QEP Resources (QEP) fell about 20% in early trading on July 30. The big news was earnings, which were released after the close on July 29. The stock action alone will tell you the news wasn't very good.
So what
QEP Resources, like many other oil and gas companies focused on the U.S. shore space, is getting hit hard by low energy prices. The economic shutdowns enacted around the world to slow the spread of COVID-19 have led to a material decline in demand for oil, at a time when supply was already a little high. Energy prices have collapsed, actually falling below zero at one point earlier in 2020.
Image source: Getty Images.
With a supply/demand imbalance keeping energy prices in a low range, it's hardly surprising that QEP lost $0.76 per share in the second quarter, down from a profit of $0.20 per share in the same period of 2019. Taking out one-time items, the company's loss was just $0.06 per share, but that fell short of Wall Street expectations of a loss of $0.02 per share. It wasn't a good quarter, and investors reacted accordingly.
To make matters worse, QEP is also trying to manage a debt-heavy balance sheet. It was able to work out an amendment to a key credit agreement in June that relaxed a number of debt covenants. So its lenders are still willing to work with it, but that's really just a temporary fix meant to help the driller muddle through a period of weak oil prices. That said, the company generated positive free cash flow, but largely because of a reduction in capital spending. This is a mixed blessing, since lower capital spending will ultimately lead to slower growth (or outright contraction) even though it helps to improve liquidity today. Basically, the company's financial situation is still tentative and won't materially improve until oil prices rise from current levels. The supply/demand imbalance, however, will likely take some time to even out, so there's no clear timeline for an improvement in the company's underlying business. The longer low oil prices linger, the worse QEP's long-term outlook gets.
Now what
QEP Resources continues to struggle through this energy sector downturn, which has generally hit onshore U.S. drillers particularly hard. Investors looking at the energy space can probably find other options that don't have the same high-risk profile. That said, until oil prices mount a sustained rally, volatility is likely to be the norm for all energy-related stocks.
