This is not the time to be a contrarian in the oil patch.
The integrated players are going to feel the pain on all levels, from upstream to downstream. The niche players will have serious growth problems, regardless of how broad or deep their respective niches are.
Morgan Stanley put out a report a couple weeks ago predicting that the recovery in oil prices will be “far worse than 1986,” which is to say, very slow. It goes on to say that we’ve never been in a situation like this — OPEC versus new U.S. producers — and that makes it even tougher to predict.
What’s more, one of the only lifelines for shale producers (and big oil subsidiaries) is the zero-interest rate environment. If the Federal Reserve raises rates it could be the straw that breaks the back of many independent exploration and production (E&P) companies.
Here are seven oil stocks to avoid at all costs in today’s environment.
7 Oil Stocks to Avoid: PetroChina (PTR)
PetroChina (PTR) has a full basket of troubles, and that won’t change soon.
First, the Chinese economy is not in good shape. Yes, it’s still expanding nearly 7% a year — an enviable rate for any other nation — but that’s nearly 50% lower than expectations a couple of years ago.
The middle class — the people that buy cars and travel by plane — is not experiencing the growth it once did. While stockpiling reserves works well for a nation, it doesn’t help a corporation.
PTR just doesn’t have anywhere to sell its oil. In late March, PTR cut capital expenditures by $42 billion. That’s a lot of spending to slash — and you don’t pop right back after cutting that much out of your budget.
In the past year, the stock has dropped 29%. And given the madness in the Chinese stock markets, there’s little chance that PTR will not be hurt by that, too.
Its only attractive aspect is its 5.1% dividend yield, but there’s better places to look for that kind of yield.
7 Oil Stocks to Avoid: Chevron (CVX)
Chevron (CVX) is an integrated big oil company, but this is one time where vertical integration has not helped. It’s now simply exposed to every sector of the wounded energy patch.
If prices are lower, then its margins all the way up the production stream are narrower and its profits are lower.
Even its big stake in natural gas hasn’t been enough to keep CVX ahead of its peers. The company announced last week that it’s cutting 1,500 jobs as part of a larger strategy to trim costs by $1 billion.
This isn’t what companies do when they’re expecting a quick return to higher prices. This is what they do when they prepare to hunker down for the long term.
There are calculations that the oil and gas industry has lost $1.3 trillion in value since the beginning of the year. The fact that CVX has a lot of natural gas, as well as oil, is not helping.
The stock sports a 5% dividend but it’s off 24% year to date, so it’s not helping much.
7 Oil Stocks to Avoid: Exxon Mobil (XOM)
Exxon Mobil (XOM) has similar problems to CVX. Its massive size means it’s affected on all fronts by the slowdown in production as well as consumption of oil and gas.
Now, these big firms are looking to run as lean as possible until the clouds lift. Until there is some vibrant growth somewhere in the world, it will take a long time for demand to catch up with the massive oversupply on the market.
Early on, China was filling up its reserves with cheap oil. But now the strategic reserves are full and oil is still cheap.
The biggest reason for the weak demand is there are no bright spots for growth. The U.S. and U.K. are the only places on the planet that are considering raising rates because economic growth is recovering.
However, that growth is about 2% GDP in the most optimistic assessment. That’s hardly a game-changing development in the grand scheme of things.
XOM is off 15% year to date and turning this battleship around will take some time, so even if energy prices and demand rebounded it would still take some time to see XOM firing on all cylinders again.
7 Oil Stocks to Avoid: Occidental Petroleum (OXY)
Occidental Petroleum (OXY) is primarily an international oil and gas E&P firm. But it also has some midstream operations, which is a relatively safe haven during the current energy patch crunch.
Midstream is basically storage and transport (think pipelines) of oil, gas and NGLs (natural gas liquids). It’s still not a big winner unless demand is increasing, but prices are based on throughput, not on commodity prices.
So, if the U.S. economy continues to strengthen, and demand rises for natural gas, OXY operations will garner more revenue even if natural gas prices don’t move.
There’s no doubt that OXY is underpriced here. But that’s also assuming there’s no more downside left for the company. That’s the rub.
As long as there’s weak global demand and Saudis continue to overproduce, it’s hard to produce oil profitably at new –and even existing — wells.
This explains why the stock held up fairly well in the first quarter of the year but has dropped 10.5% in the past three months. As oil prices recovered from their December swoon, OXY wasn’t in bad shape. But as soon prices fell again, the selloff began. And there may be more selloffs ahead.
7 Oil Stocks to Avoid: Vermillion (VET)
Vermillion (VET) is an interesting Canada-based E&P firm with a decent amount of exposure to gas plays in Europe. This is certainly a much stronger sector than the energy patch in North America.
The problem is, gas demand is down at this point in Europe and it won’t return for another quarter or two.
In the meantime, VET has to deal with a weakening Canadian dollar versus the U.S. dollar, which makes its oil and less valuable on the open markets since energy is priced in dollars. The Saudis’ overproduction hurts non-U.S. producers more than U.S. producers precisely because of this.
VET has lost 23% in the past few months as oil prices dropped after having a decent first quarter. Its fate is very much tied to oil prices and a lengthy run at current prices is going to make it very tough for VET to thrive.
That’s also why you have to consider its tantalizing 6% dividend more illusion than reality. If prices don’t improve and demand stays at these levels, at some point it’s likely VET will cut its dividend, which will lead to even more of a stock selloff.
7 Oil Stocks to Avoid: Halliburton (HAL)
Halliburton (HAL) is one of the world’s leading oilfield services firms. Of course, if there are few people in the fields and fewer fields being developed, the demand for HAL’s services would be on the decline.
But since it’s one of the major energy patch players, HAL saw this moment in history as a great time to consolidate. In November of last year it launched a $34.6 billion merger for Baker Hughes (BHI), a sizable competitor.
Given where we are today, the merger made perfect sense. The only problem is, the U.S. Department of Justice continues to be concerned that there are some serious antitrust issues involved in the deal.
Last week, the Justice Department issued a second round of questions for HAL to answer regarding the merger. Merging the No. 2 and No. 3 oilfield services firms has drawn concern around the globe, so even if the U.S. gives its OK, it still has to be approved in Europe, South America and Asia.
It’s just one more complication that’s not worth buying into right now.
7 Oil Stocks to Avoid: Dril-Quip (DRQ)
Dril-Quip‘s (DRQ) troubles are a microcosm of HAL’s troubles. It specializes in offshore drilling equipment and services, specifically in deepwater and harsh conditions.
The two biggest deepwater “elephant” finds in recent history were off the coast of Brazil about five years ago. But if you’ve seen the problems Brazil has been having with government and corporate corruption, you can imagine how far back that has put efforts into exploiting these finds.
In other offshore operations, just like onshore, low prices means more rigs are shutting down than ramping up.
The stock is off 23% in the past three months and while it may have its good days, there isn’t much hope that it’s going much higher unless and until oil prices start to rise and demand comes back on line in the form of more global growth.
DRQ also has a fair amount of exposure in Asia, which isn’t helping right now.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.