What: Today, like so many others over the past 18 months, has not been a good day to be invested in independent oil and gas producers. Thanks to a few analyst downgrades, and a 5% decline in crude oil prices, scores of companies saw shares slide at least 10% by the end of trading today including:
|Company||% Price Change (Jan 6)|
|WPX Energy (NYSE:WPX)||15.9%|
|Denbury Resources (NYSE:DNR)||14.4%|
|Marathon Oil (NYSE:MRO)||11.7%|
|Stone Energy (NYSE:SGY)||16%|
So What: The big theme of the day was that oil prices declined more than 5% to less than $35 a barrel, the lowest since 2004. While US based production is starting to slow and crude oil inventories are starting to slowly decline, today a large surge in gasoline and refined product inventories was the culprit. The 10.6 million barrel increase was a much larger build than the 5.1 million barrel drawdown in crude inventories we saw last week. If there is a boroader lesson to these things, it's that you shouldn't make any drastic moves based on some scant data about production or inventories because they can be very erratic. Here's a quick run down of why each company listed above took more than a 10% dip today.
WPX Energy: After making a show of strength back in August by buying private oil producer RKI Exploration & Production, LLC for $2.75 billion, WPX Energy now finds itself selling off some of its pipeline and other midstream assets to shore up the balance sheet and generate enough cash to maintain production budgets. Just last week it announced that it had completed the $309 million sale of a gathering system in the San Juan Basin to a private equity fund. Now that the company has a much larger exposure to oil prices thanks to that RKI acquisition, those lower oil prices today really are making investors scared
Denbury Resources: While Denbury has done better than some others about keeping a more conservative approach to its spending and keeping its debt in check, that doesn't mean it is immune from these problems. In a recent announcement, the company is looking to switch some of its suborinated debt in exchange for unsecured notes. In exchange the company is offering higher interest rates, but so far the response from the market has been tepid at best.
Marathon Oil: One thing that is surely going to sting for Marathon when it reports its earnigns in the coming quarter is the fact that the company's production is heavily werighted toward oil, especially in North America. during its last quarterly earnings, more than 71% of total production was weighted toward oil, and most of that oil was sold at a discount to benchmark prices like West Texas intermediate. Last quarter, those benchmark prices were in the $45-$50 per barrel range for both domestic and international oil. With oil below $40 per barrel for a decent portion of the fourth quarter, don't be surprised if next quarter's results look even rougher.
Apache & Stone Energy: Both Apache and Stone got bit by the analyst downgrade bug recently. Yesterday, analysts at Bank of America downgraded Apache from "neutral" to "underperform" saying that it's previous price target of $54 was too rich of a valuation. Luckily for those analysts the stock trades for $38 a share instead. Stone Energy's downgrade came courtesy of both FBR Capital and Imperial Capital. FBR moved Stone from "outperform" (although down more than 77% in 2015 hardly seems like a stock that should have had an outperform label in the first place) to "market perform" . Imperial added even more fuel to the fire by cutting its price target from $8 to $6. For investors in Stone, though, $6 a shares would seem like a godsend compared to today's price that is closer to $3.50
Now What: Like so many other hectic days in the market, there wasn't a whole lot going on at each of these companies specifically that would alter anyones investment thesis. Watching companies drop double digits seems like a common occurrence in commodities as of late. The one aspect that may be worth watchin here is whether Denbury will be able to renegotiate its debt. If it can't then it may be forced to take some other measures to pay it off. Other than that, today seems like much ado about nothing.