What happened
Oil prices continue their slow march back up after cratering to below $15 per barrel, and even flirting with negative oil prices for a day. Today, the June 2020 contract for West Texas Intermediate rose to $33 as of 1:30 p.m. EDT.
That rise in U.S. domestic oil prices is bringing oil and gas companies with it. Even though the price of oil is up 3% today, shares of midstream company EnLink Midstream (NYSE:ENLC); oil and gas producers Kosmos Energy (NYSE:KOS) and Crescent Point Energy (NYSE:CPG); and oil services and equipment providers Helix Energy Solutions (NYSE:HLX) and NexTier Oilfield Solutions (NYSE:NEX) all were up more than 10% as of the time of this writing.
Image source: Getty Images.
So what
This eclectic group of oil and gas stocks are all more or less connected by one thing: Their stock prices have fallen into penny stock territory lately. Even including today’s share-price jumps, all five of these stocks have tanked at least 54% in 2020 and are well below $5. Stocks that fall this far and have low share prices like this tend to be incredibly volatile. Other than the change in oil prices, there isn’t any other significant news for these individual companies.
Crude oil is up today after the U.S. Energy Information Administration (EIA) reported a decline in crude oil inventories at Cushing, Oklahoma. Cushing is the largest crude oil storage hub in the U.S. and tends to be a gauge of overall oil and gas in storage. One of the biggest concerns in recent weeks was that oil storage capacity was going to be overwhelmed as demand for fuel fell off a cliff and producers couldn’t cut output fast enough. So a decline in inventory is a good sign.
But investors need to put this information into context. None of the companies mentioned here are going to be directly affected by this news. All of Kosmos Energy’s production comes from offshore sources, much of it from Ghana and Equatorial Guinea in Western Africa. Crescent Point Energy is an onshore producer, but it focuses mostly on Canada. These companies will benefit from rising oil prices, but most of their production isn’t priced in West Texas Intermediate, so it will be contingent upon other oil benchmark prices rising as well.
NexTier Oilfield Solutions and Helix Energy Solutions are both oil-field services companies, so prices won’t matter as much to them as does total capital spending from oil and gas producers. Even before this recent oil price crash, oil and gas producers had relatively modest capital spending budgets. Today, those spending rates are at the bare minimum. NexTier’s primary focus is providing services related to hydraulic fracturing, which generally requires active drilling. At these prices, the active count of rigs operating today has fallen through the floor. Until we see a significant uptick in drilling activity, NexTier is going to suffer mightily. Helix’s business hasn’t been as affected, since it primarily focuses on maintaining and servicing offshore wells, but management noted that costs are up significantly based on logistical challenges for its workers.
EnLink is the least exposed to oil price movements as a midstream company that mostly focuses on natural gas gathering and processing, but it has been having its own issues. The company has already significantly cut its capital spending and its payout as several of its customers are now expecting lower volumes moving through EnLink’s system. Even after these moves, though, it has a distribution yield (a master limited partnership’s dividend) of 46%. Sending that much capital out the door each quarter is unsustainable.
Now what
All five of these oil and gas stocks are going to be incredibly volatile for some time. They all have significant issues related to lower revenue and trying to manage debt loads. Unless we see a significant uptick in oil prices and capital spending across the sector, there’s a good chance that all of these companies could face bankruptcy. Perhaps there are some day traders who think they can make a quick buck getting in and out of these stocks, but anyone looking for a long-term investment would be better off avoiding these companies for the foreseeable future.
