The energy sector hasn't been too kind to investors in 2020. Several companies large and small have written down the value of their assets, cut dividends, missed interest payments, or flat-out gone bankrupt.
Instead of rattling off several energy stocks that are down close to 100%, it's probably more helpful to focus on recognizable companies from different segments. Let's discuss ExxonMobil (XOM 0.39%), Diamond Offshore Drilling (DO), National Oilwell Varco (NOV -0.63%), Occidental Petroleum (OXY -1.96%), and Phillips 66 Partners (PSXP) to highlight why these five companies have had a particularly challenging year.
1. Big oil: ExxonMobil
ExxonMobil's stock is down 42% year to date (YTD), making it among the worst-performing big oil companies. Shares of all seven integrated majors are down, but Exxon has had a particularly difficult year. Investment projects have pressured Exxon to maintain high spending despite generating less operating cash flow than its competitors.
In late August, ExxonMobil was removed from the Dow after nearly 100 years. Months later, Chevron passed Exxon to become the largest oil major by market capitalization traded on the U.S. market. Exxon's market capitalization is now just $173 billion, a far cry from its peak of over $525 billion on Oct. 18, 2007.
Less than 20 years ago, Exxon was the largest U.S. company by market capitalization. Once considered a blue chip stock for its industry-leading position and stable dividend, the ExxonMobil of today is underperforming its peers. Its portfolio of unprofitable assets is pressuring Exxon to writedown an estimated $20 billion in the fourth quarter. If you invested $10,000 in Exxon 10 years ago, you would have lost money, including dividends. If you invested in the S&P 500, you would have tripled your money. Bruised and battered, Exxon is limping toward the 2020 finish line with little hope to turn things around in 2021.
2. Oil drilling: Diamond Offshore Drilling
Oil drilling has been one of the hardest-hit oil and gas subsectors this year. Lower oil and gas prices and a decrease in demand for transportation fuels like gasoline, diesel, and jet fuel have severely affected the drilling industry. When oil and gas prices are low, operators like Exxon have less reason to contract a drilling company to bring more production online. Shares of even the best drilling stocks like Helmerich & Payne have been trending down for years as operators tighten spending and focus on developing existing wells.
Diamond Offshore Drilling was once a prominent drilling company. But right around the time when WTI crude oil futures fell below $0 a barrel, Diamond Offshore Drilling was forced to file for bankruptcy. Once on the New York Stock Exchange under the ticker symbol "DO," its shares have since been delisted. Five years ago, the company was worth billions. Today, it's worth peanuts, with shares down 98% for the year.
3. Oilfield equipment & services: National Oilwell Varco
Like drilling contractors, oilfield equipment & services companies can rake in profits when oil prices are high. Just look at Schlumberger when oil was $100 a barrel. Today's market isn't so giving. In fact, even prominent oilfield services companies like National Oilwell Varco are struggling this year.
National Oilwell Varco has seen quarter after quarter of losses. With drilling contractors struggling to make ends meet or going bankrupt, there simply isn't a viable market for the company's products and services like its advanced automated directional drilling control system, NOVOS. Shares of National Oilwell Varco have actually rebounded substantially in the past month, but are still down 44% for the year.
4. Oil exploration and production: Occidental Petroleum
Occidental Petroleum, commonly known as "Oxy," isn't the worst-performing exploration and production (E&P) company. There are plenty of smaller E&Ps that have sold off more. However, Oxy is arguably the prominent example of an underperforming E&P.
The saga of Oxy's downfall started in May of 2019, when it announced it had outbid Chevron for Anadarko Petroleum. In hindsight, Oxy overpaid for the assets as plenty of companies, including Chevron, have acquired similar assets for a much cheaper price.
Instead of spewing profitable black gold, Oxy is spewing several red flags that could mean its stock is headed lower. Its earnings, debt, and financial leverage are all in terrible shape. Over the past few weeks, shares of Oxy have rebounded along with the broader energy sector. But there's reason to believe it won't survive another crash in crude oil prices.
5. Midstream: Phillips 66 Partners
Phillips 66 Partners is the master limited partnership (MLP) of parent company Phillips 66. Phillips 66 Partners is tasked with the midstream side of the company's business, mostly through oil pipelines and storage terminals. MLPs like Phillips 66 Partners are focused on generating free cash flow and distributing it to their unitholders. The company has done an impressive job at increasing its distribution, which has nearly doubled in the last five years. Its distributable cash flow continues to exceed its dividend distribution.
Units of Phillips 66 Partners currently have an attractive 12% dividend yield. It's not the company's current performance that's driving its units lower. Instead, concerns regarding the long-term profitability of the company's existing assets and the feasibility of its planned projects have resulted in its unit price falling over 50% YTD.
Better buys now
Many energy stocks have sold off this year. Although the sector has come back nicely in recent weeks, several companies remain too risky to invest in. Investors should forget companies like ExxonMobil and focus on those that have a better chance of outperforming the broader market over the long term.