What happened?
Shares of Centennial Resource Development (NASDAQ:CDEV), Patterson-UTI Energy (NASDAQ:PTEN), Nabors Industries Inc (NYSE:NBR), and Tellurian (NASDAQ:TELL) are all down between 9.5% and 14% as of 12:44 p.m. EDT on May 13.
So what
A few things are driving oil stocks lower today.
First, oil markets got some mixed data in the past couple of days regarding crude oil inventories. According to today’s oil weekly petroleum status report from the U.S. Energy Information Administration (EIA), U.S. commercial crude oil inventories actually fell by about 700,000 barrels last week, as did gasoline inventories. Yet even with these modest declines, inventories of oil and all types of refined products are still well above the five-year average.
On Tuesday, the American Petroleum Institute’s (API) weekly report said U.S. crude inventories increased 7.6 million barrels, both well above the 4.1 million barrels that was expected and diverging significantly from the EIA report. According to API, the two reports work with essentially the same data, covering about 90% of all U.S. oil activity.
A glut of oil and economic uncertainty are weighing on oil stocks. Image source: Getty Images.
Next, stocks in every sector are crashing hard in afternoon trading today. The SPDR S&P 500 ETF Trust (NYSEMKT:SPY) is down 2% following a speech from U.S. Federal Reserve chairman Jerome Powell. In the speech, Powell spoke about the uncertainty of the U.S. economy, saying “…the path ahead is both highly uncertain and subject to significant downside risks.”
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Now what
Powell’s speech highlighted the root cause of the oil market crash: The global response to the coronavirus pandemic to limit the spread of COVID-19 has ground the economy to a standstill. As a result, oil demand has crashed, sending crude prices plummeting to levels last seen more than 20 years ago. Meanwhile, producers including Centennial Resource have continued producing more oil than the market can consume, compounding the imbalance further, even as they slash spending to cut costs.
And that’s carried over to companies like Patterson-UTI and Nabors, which provide drilling and other services to oil and gas producers in the field. Producers are cutting everywhere they can, and that means service providers like those two are seeing demand — and therefore cash flows — dry up.
Even Tellurian, which is in the natural gas export business, is impacted. The company is in the early stages of developing a multi-billion-dollar LNG export facility, and was counting on a combination of capital markets and investments from integrated major oil and gas companies to fund it. In the current environment, lenders will prove reticent to invest in the oil patch as more and more companies go bankrupt, while the oil majors Tellurian was looking to partner with are going to spend the next year circling the wagons to retain capital, not making big investments in a project that’s still years away from generating any cash flows.
The bottom line is this: Even with oil prices up from the late-April bottom, the industry is still in a massive state of disarray that could last through the end of 2020 and well into next year. Until we start to see supply and demand get more in phase, every day that passes will delay the eventual recovery for the oil industry, causing the companies on this list to burn more cash and/or take on more debt to bridge their own shortfalls. Simply put, the oil patch probably isn’t the best place to bargain hunt right now.
