What: Shares of energy companies were pummeled again today after the price of crude slumped 3%, closing below $30 a barrel, and raising bankruptcy fears within the sector. Most of the sector was down today, with SM Energy (SM 1.74%), ONEOK (OKE +0.33%), Denbury Resources (DNR +0.00%), Oasis Petroleum (OAS +0.00%), and Chesapeake Energy (CHK +0.00%) experiencing the deepest sell-offs today, each down by more than 10% by 3:15 p.m. EST on Monday.
So what: The primary driver of today's drop in the oil price was the outcome of a meeting between OPEC members Saudi Arabia and Venezuela over the weekend. Venezuelan oil minister Eulogio del Pino met with his counterpart to try to win support for a plan to prop up crude prices. While the meeting was said to be "productive," it didn't end with an agreement to have an emergency meeting to discuss an output cut.
Without an artificial reduction in supply by OPEC and other major producing nations, the price of oil will likely remain under pressure until production starts to naturally decline from the lack of investment in the sector during the past year. Even once supplies match demand, the industry has a glut of oil in storage to work off, suggesting that prices could remain weak for quite a while.
That's a big concern for SM Energy, Denbury Resources, Oasis Petroleum, and Chesapeake Energy, because these companies don't have the cash to wait out a really prolonged downturn in the oil price. Chesapeake Energy, in particular, is teetering on the brink of bankruptcy due to its large debt load, with reports surfacing today that it hired restructuring lawyers. Those reports not only sent its stock down, but weighed on other balance-sheet-constrained oil companies because they could potentially be swept up in a bankruptcy wave if a company as large as Chesapeake went under.
These fears are also putting pressure on midstream companies, with investors worried that a bankruptcy wave among oil and gas producers would have an impact on the operations of these companies, as well. It's that overall dour market outlook that's one reason why ONEOK was downgraded today by Robert W. Baird, which cut it from outperform to neutral. It just doesn't see any positive catalysts on the horizon.
Now what: Today was another really tough day for the energy sector. While the renewed weakness in the price of crude is the primary driver today, investors are growing very concerned that a bankruptcy wave could hit the sector. These fears aren't likely to abate until the oil market shows real signs that the supply overhang is in the rearview mirror.
