Shares of energy services provider Core Laboratories (NYSE:CLB) rose nearly 9% in the first two hours of the trading day on Nov. 23. Even more impressive was the nearly 14% gain at Helix Energy Solutions (NYSE:HLX). Besting that advance was Transocean (NYSE:RIG), which saw a price increase of nearly 20% in early trading. The big price moves here all relate back to the same general theme: improving oil prices.
There are multiple relationships involved here. For starters, Core Labs, Helix, and Transocean all provide vital services to energy companies as they seek out and drill for oil and natural gas. However, demand for their services is highly reliant on oil and gas prices. Higher energy prices tend to lead to more drilling and lower prices usually result in exploration and production (E&P) companies pulling back on capital spending. In other words, rising and falling energy prices, from a big-picture point of view, correlate to rising and falling demand for energy services companies.
Thus, the simple logic for the price moves for this trio is that energy prices rose today and led to an upbeat view among investors. Essentially, Wall Street expects that demand for Core Labs' digital well enhancement services and Helix's and Transocean's offshore drilling services would increase from current levels. But there's a bit of twist here: All three of these companies have been posting weak results of late. For example, Transocean's third-quarter 2020 adjusted loss was $0.11 per share, down from breakeven in the second quarter of the year. Helix's earnings per share through the first nine months of the year came in at $0.10, compared to $0.33 in the same period of 2019. And Core Labs earned $0.07 per share in the third quarter versus $0.53 per share a year ago.
The reason for the weakness is that the economic shutdowns being used to slow the spread of the coronavirus have resulted in a massive supply/demand imbalance in the energy patch and lingering low prices. With supply dwarfing demand, E&P names have been forced to dramatically reduce their capital spending plans. The tap-on effect is that energy services names have been dealing with business headwinds. Thus, rising energy prices are extra positive right now.
Indeed, each of the last three weeks has seen an upbeat development on the vaccine front. The most recent is out of AstraZeneca, which reported its COVID-19 vaccine was up to 90% effective in the trials it's conducting. With three vaccines showing promising early results, investors are increasingly upbeat that demand for oil and gas will start to return as economies are allowed to fully reopen. That should help to sop up the excess supply hanging over the energy sector. But that's not the only dynamic in the market, since supply is being constrained by energy industry pullbacks, too. OPEC, for example, has been curtailing production to help rectify the supply/demand imbalance from the supply side. Since vaccines will likely take a while to jump-start demand, energy investors have also been cheered by the increasing belief that OPEC will continue to keep supply in check even after its current round production cuts rolls off.
When you put all of these different pieces together, you get rising oil and gas prices and rising share prices for Core Labs, Helix, and Transocean. The only problem is that one day does not make a trend and, frankly, this is a complex and dynamic time in the energy industry. In normal times the volatile energy sector is just as likely to see prices fall as rise over short periods of time. Today, investors are even more fickle. Making matters worse for this trio of stocks is the fact that the shares of energy services companies tend to move more dramatically than the shares of their largest customers. In other words, investors should remain prepared for elevated price volatility at Core Labs, Helix, and Transocean. Most investors looking at the energy patch for bargains today should probably stick to large diversified drillers, like Chevron, which also happens to have one of the strongest balance sheets in the industry.