What: Energy stocks were slammed on Friday after crude oil dropped 3.7%, to close below $30 a barrel for the week. This fueled a pretty big sell-off among energy stocks, with EP Energy (NYSE:EPE), Calumet Specialty Products Partners (NASDAQ:CLMT), Southwestern Energy (NYSE:SWN), Cobalt International Energy (NYSE:CIE), and Laredo Petroleum (NYSE:LPI) all closing down double digits.
So what: EP Energy was by far the worst performer on the day, ending down 29%. While the drop in oil certainly didn't help, the main fuel behind its sell-off today was a downgrade by UBS, which cut it from buy to neutral, and slashed its price target from $4.50 to $2.75. Analysts said that the company's "onerous debt loads" will limit its ability to spend enough money to keep production flat this year.
Joining EP Energy with a downgrade was Calumet Specialty Products Partners, which was downgraded from outperform to neutral by Credit Suisse. Its price target was also slashed from $32 to $18 in response to its weak fourth-quarter results. While analysts like the direction that Calumet is heading with it focusing on specialty businesses instead of commoditized offerings, it faces a tough road ahead.
Meanwhile, Southwestern Energy received a downgrade of a different sort after credit-rating agency Moody's lowered its credit rating by four notches, from Baa3 to B1, pushing it well below investment grade. It cited the company's increasing leverage due a big acquisition early last year, and decreasing EBITDA due to weaker oil and gas prices.
Finally, Cobalt International Energy and Laredo Petroleum slumped primarily due to today's drop in oil prices. Both are very small producers in the grand scheme of things, and their lack of size and scale will hurt them if oil remains weak and credit continues to tighten. Laredo Petroleum, for example, will only generate enough cash flow this year to fund 75% to 80% of its capex budget, and that's with a very strong oil hedge portfolio in place for this year. Meanwhile, Cobalt is just starting to produce oil from its first offshore project, so its cash flow is very light right now.
Now what: The longer oil stays lower, the deeper it will impact smaller energy producers like EP Energy, Southwestern Energy, Cobalt International Energy, and Laredo Petroleum. That's why analysts continue to caution investors with downgrades detailing potential risks, none of which will go away until oil stabilizes at a much higher price.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.