Oil stocks have been really beaten down over the past year. That's after oil production surged past demand, leading to a glut of oil hitting the market. This glut caused oil prices to do this:
Because oil prices are what fuel the cash flows and asset values of oil companies, most oil stocks have sold off as well. However, some oil stocks have sold off well below oil prices. These oversold oil stocks, which is just Wall Street jargon suggesting that the market has overreacted in a panic, have sold off so deeply because investors fear these oil stocks could end up going belly up if oil prices remain weak for a while due to the large debt loads these companies are burdened with.
Oversold despite protection
While there are a number of oil stocks that qualify under the oversold category, five in particular could really rally along with oil prices. That's because these stocks sold off much deeper than the 50% drop in the price of oil as we see on the following chart.
As we see on that chart BreitBurn Energy Partners (NASDAQOTH:BBEPQ) sold off the most as its units are down a devastating 72.1%. This is despite the fact that it, and every other company on that list, has much of its cash flow protected either via commodity price hedges or long-term contracts. Those protections give these companies time to wait out the storm in the oil market by securing a good portion of their cash flow for the next couple of years. That cash flow protection gives these companies the time they need to make changes in order to survive so they'll be around whenever oil prices rally.
Making the moves that matter
All five companies have already made changes as they wait out the market's weakness. Linn Energy (NASDAQOTH:LINEQ) and BreitBurn have cut their shareholder distributions dramatically in order to preserve cash while Seadrill (NYSE:SDRL) eliminated its dividend for the same reason. The cash saved by cutting shareholder distributions is being used to reduce their debt levels so that all three can maneuver through the current storm. Further, all three are also hoping the additional liquidity will enable them to be able to be proactive and acquire even weaker rivals during the downturn so they can thrive once they emerge out of the current market weakness.
Meanwhile, the other two oversold oil and gas drillers, SandRidge Energy (UNKNOWN:SD.DL) and Halcon Resources (NYSE:HK), cut their capital expenses dramatically in order to preserve liquidity. SandRidge cut nearly a billion dollars in capex spending for 2015 as the company only invests in wells that will move the needle at current commodity prices. Halcon Resources, likewise, has cut back on its spending as its 2015 capital budget will be half of what the company spent last year.
By cutting back on cash flowing out of their businesses these five oil stocks are making sure they have the liquidity to survive the current oil shock. Further, they are not wasting money on low return drilling projects or on excess interest at a time when liquidity is at a premium. Instead, these companies are working to preserve their balance sheets so that they'll be around when oil prices rally.
No one knows when, or even if, oil prices will rally in the future. That said, if oil prices do meaningfully rally these five oversold oil stocks could rally even harder than oil prices because of how deeply they sold off when prices collapsed.
Matt DiLallo owns shares of Linn Energy, LLC, SandRidge Energy, and Seadrill. The Motley Fool recommends BreitBurn Energy Partners and Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.