What: Energy stocks continued their wild, wild ride today as a slew of companies in the oil and gas industry saw strong gains. Unlike most days, when only producers feel the effects of oil and gas prices, companies across various energy subsectors felt the love. Companies across the industry include Southwestern Energy (NYSE:SWN), Sanchez Energy (NYSE:SN), Nabors Industries (NYSE:NBR), Precision Drilling (NYSE:PDS), and Ensco (NYSE:ESV)
So What: Sometimes, it's really difficult to understand why the market works in the way that it does, because a few of the companies mentioned here probably should have seen shares head in the opposite direction. Let's start with Southwestern Energy. Most oil and gas drillers in the space moved a bit as the price of oil climbed ever so slightly, but remained rather close to $35 a barrel. Not a great price for producers, but a heck of a lot better than the sub $30 per-barrel prices we saw a month ago. The problem here is that Southwestern Energy is almost exclusively a natural gas producer, and the price of natural gas actually declined to an absurdly low $1.63 per-million BTU -- a price at which no gas producer in the country can make a reasonable return.
In the same vein, we have drilling-rig contractors Nabors Industries and Precision Drilling. The two companies lease rigs to oil and gas producers, and a major driver of their business is drilling activity and the active rig count. However, total active rigs in the U.S. is on the decline, and is about to match 1998's rig count, a level that is the lowest since we started keeping track of rig count back in the 1940s.
For Sanchez and Ensco, there wasn't any real company-specific news, but both Sanchez and Ensco's shares are down 85% and 79%, respectively, since oil prices started to decline in June of 2014. With shares down that low, it doesn't take a whole lot of positive news from the overall industry for shares to experience double-digit gains.
Now What: If you're an investor in any of these companies, today's price jump likely put a little smile on your face; but in reality, that's probably all they are worth. Wall Street can take those gains back tomorrow just as easily as they climbed today. Until we start to see some change in drilling activity both on and offshore, Nabors, Precision Drilling, and Ensco will continue to struggle to find work for their rig fleets. As long as oil prices stay low, both Sanchez and Southwestern will struggle to maintain both production levels and their balance sheets.
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