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Why Oceaneering Intl., GasLog, Occidental, and Patterson-UTI Energy All Rallied Strongly Today

By Reuben Gregg Brewer - Jan 14, 2021 at 8:19PM

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It looks like there's been a major shift in investor sentiment. There's the easy story and the longer one.

What happened

Shares of offshore oil services provider Oceaneering International (OII 2.52%) rose as much as 10% today, ending trading with a 7% gain. That was roughly the same story as was seen at onshore U.S. drilling-services provider Patterson-UTI Energy (PTEN 6.87%) -- the company's stock peaked at 11% and ended at 8%.

Exploration and production company Occidental Petroleum (OXY -0.44%) witnessed a high of 10% and closed with an 8.5% advance. The stock of liquified natural gas tanker-owner GasLog (NYSE: GLOG) showed the same basic trend but its gains were more impressive. At the peak on Jan. 14, the stock was up 17%, while it closed the trading day with a nearly 16% rise.

A woman with offshore oil rigs in the background.

Image source: Getty Images.

These are very different companies that touch different parts of the broader energy sector. However, they all share one main thing in common -- oil and natural gas prices are important drivers of their businesses, although some more directly than others. And that's an important story.

So what

Although natural gas was lower today, oil and natural gas, in general, have been trending higher in recent weeks. That's being driven by a number of factors. For example, OPEC's decision to keep production growth to a minimum was a big plus, with giant producer Saudi Arabia actually trimming its output to offset increases by other partners. Also, a cold snap in Asia resulted in a spike in liquified natural gas prices (LNG) in the region as traders searched for LNG to refill quickly depleting inventories.

There have also been some positive developments on the inventory front in other areas, with declining numbers suggesting that the excesses built up during the early days of the global coronavirus pandemic are, perhaps, slowly becoming a lesser issue. That's largely thanks to economic growth picking up, which should get a shot in the arm (pardon the pun) as the pace of vaccine inoculations increases.      

The upshot is that supply and demand look increasingly like they're coming back into some semblance of balance. They have been deeply out of balance since supply plummeted when countries around the world essentially shut their economies to slow the spread of the coronavirus. But, as noted, various factors have been working to move the market past the issue. That includes companies pulling back on production. This is where Oceaneering International comes into play, as it helps companies drill for offshore oil. 

Oceaneering's third-quarter 2020 revenues were off 11% year over year, which shows that times aren't exactly great. However, third-quarter revenues were up 2.5% sequentially from the second quarter, hinting that things were starting to improve.

Adjusted operating earnings before interest, taxes, depreciation and amortization (EBITDA), which was about flat year over year in the third quarter, was up 11% sequentially versus the second quarter. So efforts to weather the industry downturn have clearly been a benefit. Assuming that oil and gas prices remain on the mend, however, Oceaneering's customers might actually start to spend more aggressively, which would mean improved performance for the services provider.   

OII Chart

OII data by YCharts.

That's essentially the same logic helping to drive Patterson-UTI, which works in the onshore U.S. market. The interesting thing about onshore U.S. drilling is that it's relatively easy to ramp up and down, compared to offshore drilling. Thus, the decline that the company saw in its business was more dramatic, with revenue off by nearly two-thirds, year over year, in the third quarter.

Looking at that a different way, it had 60 rigs operating in the third quarter of 2020 versus 142 in the same quarter of 2019. In the fourth quarter of 2020, the average had increased to 62. However, if oil and natural gas remain on an uptrend, that figure could potentially start to rise more quickly.   

GasLog's story is a little different, but still driven by supply and demand -- this time, the supply of natural gas and the ships that help to move it around the world. Indeed, as Asia worked to deal with the above noted LNG shortage, the price that companies were willing to pay to charter the types of ships GasLog operates more than tripled in just a few days, according to industry watchers.

That's good for ship owners like GasLog but speaks to the highly volatile nature of the tanker market. So investors need to take such moves with a grain of salt, as they can swiftly reverse course.   

Meanwhile, Occidental Petroleum's top and bottom lines are directly tied to the ups and down of the commodities it produces. So higher oil and natural gas prices are a good thing in a very direct way. But there's more to this story, too, given that the exploration and production name took on a huge load of debt to acquire a rival energy company shortly before oil and gas prices started to tank in early 2020.

In hindsight, that was an ill-timed acquisition and Occidental struggled to deal with the debt it added throughout most of 2020. Sustainably higher energy prices would make that much easier to do. This dynamic has increased the volatility of the shares. 

So what

Oil and natural gas are highly volatile commodities prone to swift and dramatic ups and downs. They have both been trending largely higher of late, and that's got investors more positive about a broad range of energy stocks. This shift, meanwhile, could be the start of a broader trend of investors inching back into a deeply out-of-favor sector, assuming energy prices at least maintain their recent levels.

With the market near all-time highs, it wouldn't be shocking to see bargain hunters nibbling here. And while this isn't a sector for conservative types, as the positives begin looking like they're starting to outweigh the negatives, Wall Street is definitely beginning to take notice. 

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Stocks Mentioned

Oceaneering International, Inc. Stock Quote
Oceaneering International, Inc.
$11.57 (2.52%) $0.28
Occidental Petroleum Corporation Stock Quote
Occidental Petroleum Corporation
$62.98 (-0.44%) $0.28
Patterson-UTI Energy, Inc. Stock Quote
Patterson-UTI Energy, Inc.
$16.89 (6.87%) $1.08

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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