Oil stocks have suffered a lot over the past half decade.
First it was the 2014 oil price crash. Just as the oil industry emerged from the collapse, the energy transition and peak oil demand themes started to weigh on the shares of Big Oil and other energy companies. Then came the growing calls from investors and shareholders that the oil industry take responsibility for greenhouse gas emissions, further depressing oil stocks and making the sector as unpopular as Big Tobacco once was.
Then came the oil price crash of 2020, as Saudi Arabia and Russia abruptly ended on Friday their three-year-long partnership in trying to fix oil prices, or as they said, ‘bring stability back to the market.’
An all-out oil price war is on again, and oil stocks are set for worse pain ahead.
First, shares in oil firms typically follow the oil price movements. Even before Russia and the Saudis broke up their oil bromance, oil prices and oil stocks had been hit by depressed demand amid the coronavirus outbreak and fears of significantly slowing economies. The energy sector has been the worst performing sector of the S&P 500 index this year.
And if the end of the OPEC+ coalition on Friday is any indication for what’s ahead for oil stocks, they are in for some very ugly weeks and months.
As oil prices collapsed by 10 percent on Friday, the SPDR S&P Oil & Gas Exploration exchange traded fund (ETF) also plunged by 10 percent to an all-time low. The Energy Select Sector SPDR fund XLE slumped by 5.6 percent on Friday and is down a massive 29 percent since the start of the year. Related: Offshore Wind To See $200+ Billion Expansion By 2025
In the S&P 500 index on Friday, the worst 15 performers included 14 energy stocks, including Occidental, Apache Corp, Pioneer Natural Resources, EOG Resources, Devon Energy, and Halliburton, as per market data compiled by MarketWatch. In the Dow 30, ExxonMobil dipped 4.8 percent and was the second worst performer.
As Saudi Arabia began the oil price war, oil prices collapsed by 30 percent early on Monday, with WTI Crude plunging to as low as $28 a barrel—indicating pain for oil stocks and for many U.S. oil producers who now face the day of reckoning with high debt, negative cash flows, and no access to capital.
Nearly a month ago, when the main concern on the oil market was the coronavirus outbreak, Moody’s warned that North American E&P firms will face high debt maturities and tighter access to capital over the next few years, with US$86 billion cumulative debt due between 2020 and 2024. Since most of the debt is held by speculative-grade companies, this implies “an elevated level of default risk for the industry,” Moody’s said on February 19.
On March 9, WTI Crude prices had plummeted to below $30 per barrel. U.S. producers will have a much lower value of their oil and gas resources against which they could borrow more money.
“A sustained bout of low oil prices will further reduce cash flow and investment into the US oil patch, causing further hits to Lower 48 production growth later this year. It takes at least six to nine months for reductions in spend to lead to lower oil production in the US Lower 48,” Ann-Louise Hittle, vice president, Macro Oils, at Wood Mackenzie, said on Friday. Related: The Great Saudi Shale Swindle
“In that time, their access to capital may be limited and their free cash flow badly hit,” Hittle said.
The biggest oil firms will not be spared either. Exxon has just said it would keep investments at up to US$35 billion per year, despite the already sliding oil prices due to the coronavirus outbreak and its economic implications.
Exxon is evaluating the pace of activity in its key growth area, the Permian, in response to the market conditions, it said on Thursday. After Friday, it has to re-evaluate the evaluation in view of the 30% price collapse. If even Exxon’s Permian activity will suffer in the coming months, imagine the carnage among the ‘smaller guys’ in the U.S. shale patch.
Oil firms and oil stocks are set for severe pain in this latest oil price crash, while Big Oil struggles to convince investors and society that it could still be part of the solution, not the problem, in the energy transition.
By Tsvetana Paraskova for Oilprice.com
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