What happened
Shares of $280 million market cap U.S. onshore driller QEP Resources (QEP) advanced as much as 11.5% on Sept. 16. The reason for the advance was a sizable increase in the price of oil. That's great, but the big picture is still pretty ugly and a lot more important than one day's price move.
So what
Oil prices have been heavily impacted by news lately, with updates on the amount of oil in storage, storms in the Gulf of Mexico, and OPEC meetings all pushing black gold higher and, at other times, lower. Today's news was generally good, so oil went up. But tomorrow could just as easily bring bad news, and oil will fall anew. The bigger problem is that the energy market is in a troubling place today, with oil sitting at levels that make it hard for exploration and production companies to turn a profit. That's largely because of the demand declines that resulted from the worldwide effort to slow the spread of COVID-19 by, effectively, shutting down vast swaths of the global economy. The outlook for oil drillers like QEP Resources depend greatly on oil rising and, thus, investors tend to boost its stock when oil goes up.
Image source: Getty Images.
The complicating factor for QEP Resources is that, like many of its onshore U.S. peers, it has historically made aggressive use of leverage to fund its drilling program. With oil prices so low today, the company's ability to shoulder its debt burden has become a major investor concern. To put a number on that, QEP Resources financial debt-to-equity ratio is a high 6 times or so. In fact, investors are pretty downbeat overall, noting that, even after today's large gain, the stock is still off by around 75% so far in 2020. The company's size and debt situation often result in its stock being heavily influenced by the moves in the price of oil.
Now what
One day does not make a trend, especially in the highly volatile energy sector. Yes, rising energy prices are a good thing for QEP Resources, so it is understandable that the stock rose along with the price of oil today. However, investors need to go in with their eyes wide open to the risks here, not least of which is the driller's strained balance sheet. And remember that oil could just as easily fall tomorrow and take this stock along with it.
