What happened
Shares of digital energy-services provider Core Laboratories (CLB) fell 5.5% in the first two hours of trading on Nov. 30, while offshore energy-services provider Helix Energy Solution (HLX 1.79%) was right there with it, dropping 10%. Meanwhile, onshore U.S. driller QEP Resources (QEP) was lower by 12%, while offshore exploration and production (E&P) company Kosmos Energy (KOS -1.32%) was lower by 11%. In other words, it was pretty bad across the entire energy landscape.
So what
The big news today isn't really oil prices, though they were lower. The story was mostly about OPEC, which has been restraining output in an effort to help stabilize the dramatic supply/demand imbalance that exists in the energy sector right now. This situation was helped along by the global coronavirus pandemic, but the story goes back much further.
Image source: Getty Images.
Indeed, at the start of 2020, supply was a bit greater than demand because of the more than decade-long growth in U.S. onshore production. Companies like QEP Resources were spending big to ramp up with what appeared to be little regard for cash flow. The spending taking place at U.S. onshore E&P names led to higher orders for services providers like Core Labs, which provides well-enhancement products.
For a while, it seemed like almost any well in the U.S. oil patch could be made to work, thanks to investors who appeared happy to keep putting new money to work in the debt and equity of drillers. Along the way, OPEC restrained its members' production to offset the production growth in the U.S.
But in early 2020, OPEC and Russia had a falling out, and the spigots opened up. Oil plunged, with key U.S. benchmark West Texas Intermediate briefly falling below zero, at one point. That had an impact across the entire energy sector, with even offshore-focused companies like E&P Kosmos Energy and offshore services providers like Helix Energy Solutions getting hit, too.
It didn't take long for Russia and OPEC to come to terms after that failed experiment, putting supply constraints back in place. However, the damage was done, since this disagreement effectively coincided with a steep drop in demand, as governments around the world shut their economies to slow the spread of the coronavirus.
This brings us to the story this weekend, when OPEC held informal meetings to discuss continuing current production curtailments. Leading into the weekend, Wall Street seemed to be thinking that OPEC would cement a deal, but that didn't happen. Clearly, not every member country is on board with the idea that production should remain subdued.
OPEC is starting formal meetings this week with what appears to be a much less certain outcome. And it could go either way, given that demand and oil prices have been improving on the one hand, but on the other hand, there's been a troubling uptick in the number of coronavirus cases lately.
Investors hate uncertainty and sold energy names across the board, with some of the smallest, most leveraged, and most exposed names feeling the brunt of the hit this morning. The list includes QEP, Helix, Kosmos, and Core Labs.
Now what
There's no way to tell which way OPEC will go, but the really big issue is the risk/reward trade-off that investors are taking when they buy one of these four energy stocks. Yes, there could be huge upside potential if oil prices head higher, but as the uncertainty around OPEC's decision shows, oil could just as easily end up lower.
The stocks of QEP, Helix, Kosmos, and Core Labs have been very volatile of late and that's not likely to end, even after OPEC has finalized its plans. Conservative investors should probably avoid this quartet, with a decided preference for large and financially strong energy names, like Chevron.
