Shares of U.S.-based oil and gas fracking companies such as Devon Energy (DVN +0.65%), APA Corporation (APA +2.56%), and Diamondback Energy (FANG +3.24%) plunged on Thursday, falling 11.2%, 14.4%, and 11%, respectively, as of 12:32 p.m. ET.
Investors might have thought the Trump administration would be a big positive for the energy sector, given the president's promises of deregulation, lower taxes, and opening up more federal land for drilling.
However, it appears the administration's tariff policy is actually a giant negative for these names, and really drillers all over the globe.
NYSE: DVN
Key Data Points
Higher costs, lower demand, what could go wrong?
It's probably not a surprise that energy stocks are falling today, and especially U.S.-focused oil and gas frackers. Both Devon and Diamondback Energy have all of their acreage within the continental U.S., and APA has a large portion of its acreage here as well.
So, all three of these companies see demand based on U.S. and global economic activity, but they also have to buy heavy equipment either from U.S.-based steel and aluminum companies or foreign importers.
Last night's shocking tariff announcement by President Donald Trump was a big negative both on the cost side and the demand side. The administration came out with much higher and more broad-based tariff rates than people had expected. And while the goal of the administration is to remove trade barriers and reshore U.S. manufacturing, that will likely take a very long time, at least for the reshoring part of the equation. And whether more goods are produced within the United States or companies choose to keep their factories overseas, costs for U.S. consumers are likely to go up.
Not only do these tariffs amount to a tax on consumers, but they are also regressive, increasing prices from everything from food, to clothing, other goods the rich and poor alike buy on a regular basis.
That could mean consumers merely spend less, travel less, and basically do less of everything. That typically means lower demand for oil. So, it's probably no surprise that oil prices were cratering today, down 7.1% as of 1:45 p.m. ET.
In addition, these companies use heavy equipment made of other commodities such as steel and aluminum. While foreign steel and aluminum were exempted from the reciprocal tariffs announced last night, imported steel and aluminum has its own 25% tariff that has already been implemented.
While the steel and aluminum tariffs are meant to help domestic steelmakers, the tariffs raise input prices for those companies that use those commodities. Therefore, these drillers will face the double-whammy of lower demand and higher prices.
What will oil and gas companies do?
While the administration has sought to "drill baby drill," these oil and gas companies are very likely to actually pull back on drilling, given increased costs of exploration and lower oil prices. APA actually announced layoffs to 15% of its workforce last month, and given the increased probability of recession, it wouldn't be surprising to see these other names follow suit.
It's very hard to know how low these oil and gas stocks will go from here given all of the economic uncertainty. But of course, that's true for most other sectors as well, especially economically sensitive and cyclical industries like upstream energy production.
This investor expects the near term to get worse; however, the big pullback could set up some interesting long-term opportunities in truly routed cyclical names at some point. But I don't think we are there quite there yet.
