What happened
Shares of Kosmos Energy (KOS +1.38%) leaped 18% within the first few minutes of trading on Nov. 24. That follows a trend of late: The offshore exploration and production company's stock is higher by around 40% over the past five trading days including today's early advance.
But Kosmos' stock quickly pulled back from its early peak, and was only higher by 7% or so at 10 a.m. EST.
So what
The big story really isn't about Kosmos, per se. What's changed lately is Wall Street's view of the energy sector. With the list of potentially effective coronavirus vaccines now up to three, there's an increasing belief that the world will, someday, get back to a more normal level of economic activity. If that happens, then oil and natural gas demand will increase. Energy prices are likely to move higher as well, and have, indeed, been rising of late. A sustained recovery will in turn mean companies like Kosmos start to see their revenues and earnings improve.
Image source: Getty Images.
Kosmos is a bit of an interesting case, however, because it is relatively small and shouldering a material amount of leverage. The company's market cap is roughly $850 million and its financial debt-to-equity ratio was nearly six times at the end of the third quarter. To put it simply, higher oil prices would be a very positive outcome for Kosmos. A roughly 35% year-over-year decline in realized oil prices was a key factor in the company's $0.09 a share loss in the third quarter of 2020. It earned $0.04 in the same stanza of 2019.
Now what
Investors are clearly becoming more upbeat about the energy sector and Kosmos Energy. However, oil and natural gas prices, which started the day higher, are notoriously volatile. Long-term investors shouldn't take a day or even a week of price changes as a sign that the industry or any particular stock has turned a corner. There's likely to be plenty more volatility ahead, on the upside and downside, before supply and demand have rebalanced.
