What happened
Shares of Phillips 66 (PSX 1.95%), Genesis Energy (GEL 1.57%), and W&T Offshore (WTI 1.26%) are down between 5% and 23% as of 2:17 p.m. EDT on Aug. 4, on a spate of investor concerns, including recent earnings results, economic outlook, and worries about the state of global oil markets on news that U.S. oil inventories are creeping higher when expectations were that they would fall.
So what
Let's start with earnings
W&T Offshore reported it produced almost 41,000 barrels of oil equivalent per day in the second quarter, both within company's guidance range, and also up 3% from the first quarter of the year. At the bottom line, W&T lost $51.7 million, though management claimed it earned $2.2 million on an adjusted basis. Free cash flow was $18.7 million, a nice positive result, but it was significantly lower than the $40 million in free cash flow from the first quarter.
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The company also recently took some financing action, with a $215 million first-lien seven-year loan at a 7% rate. This should improve its capital structure, but at a high interest rate that should serve as a reminder that it operates in a tough business, and its balance sheet still represents a significant risk. Even with the $215 million loan, W&T Offshore's working capital has increased by less than $60 million, and it had almost $718 million in debt at the end of the quarter.
Lastly, with full-year production estimates of 39,000-41,000 BOE/D indicated, that production is not likely to grow very much this year in a period when global oil demand is ramping up.
Next up, Genesis Energy. The limited partnership, which owns and operates a collection of energy infrastructure assets, reported a net loss of $41.7 million, an improvement from last year's brutal second quarter. On a cash basis, operating cash flows were $111 million, up from $62.6 million last year. Cash flows were sufficient for management to continue its $0.15 per unit quarterly dividend.
Management said the quarter was " ... in line with our expectations ... " but the company's balance sheet hasn't improved. Total long-term debt is down $41 million, but working capital -- current assets minus current liabilities -- has shrunk by half to $99 million since the beginning of 2021. And it looks like investors today are concerned that the company hasn't made as much progress as hoped for. However, management is optimistic, with CEO Grant Sims stating, " ... we remain confident that we have a clear path to tangible growth in our adjusted consolidated EBITDA, increasing levels of free cash flow, and continued debt reduction."
Today, at least, investors don't seem to be as confident as management.
Phillips 66 reported a solid second quarter, with its $296 million the company's first profit in a year. Record earnings from its chemicals segment and strong pre-tax profits from its marketing and specialties unit more than offset a $729 million pre-tax loss at the refining segment. The company also continues to invest in its future, resuming construction at its Sweeny Hub, and ramping up renewable diesel production from its San Francisco refinery, which it is transitioning to entirely renewable fuel production.
Moreover, CEO Greg Garland also hinted that a dividend increase could be around the corner, so long as the trend of growing earnings continues. Operating cash flow more than doubled, reaching $2 billion in the first half of the year, more than double the same period last year, and far in excess of the $788 million it paid in dividends in the period.
Delta variant, oil supply worries weighing on oil stocks
While none of the companies above delivered blowout results, the market's sell-off of their stocks is probably less related to their earnings results -- or lack of them in two cases -- and more a reflection of oil market uncertainty.
Crude oil prices are down again today, with West Texas Intermediate off 3.2% to $68.33 per barrel, and Brent Crude futures down 2.5% to $70.63. This is the third straight day of declines for crude oil futures, on a combination of worries about the delta variant of the coronavirus putting the brakes on the global economic and travel recovery. The variant, which is far more contagious than other strains, has become the dominant source of COVID-19, and cases are surging all over the world, along with hospitalizations and deaths, particularly among unvaccinated people.
Today's weekly petroleum status report from the U.S. Energy Information Administration seemed to confirm some of the concerns that oil markets are headed back toward oversupply. The report released on Aug. 4 showed a 3.6 million increase in crude inventories, a huge reversal from expectations that inventories would fall 4 million barrels.
Now what
First things first: The oil market environment today is far different than it was a little over a year ago. Global oil markets are far more stable, and crude prices are at some of the highest levels in the past five years, while oil demand, in general, is likely to continue growing in the second half of 2021 as travel and economic activity recovers.
With that said, there will likely be bumps along the way, and oil prices will remain volatile as traders speculate on whether prices will rise or fall. And for these companies, that's where a strong balance sheet comes in. Phillips 66 is in a great position in this regard, while W&T Offshore has made progress, but has a lot of work still to do, and Genesis Energy is somewhere in between. Neither are likely to find themselves in any major financial trouble so long as there's not a major oil crisis in the next year.
However, if it's a safe oil investment you're looking for, with some upside, Phillips 66 is easily the top stock. Its dividend yield is over 5% at recent prices, the payout is very secure, and the company is positioning itself for the future of energy as well as the present.
