Be careful what you wish for. It’s an old adage that warns of the often frightening irony that can strike the heart of the discontented or the overly ambitious.
Most often prescribed anecdotally or in a personal context, few would apply the maxim toward energy stocks, yet this is exactly the situation to which we find ourselves.
Drivers across America complained bitterly when Brent Crude Oil prices spiked more than 430% from the beginning of 2000 until the summer of 2008, demanding a respite from the onerous pain at the pump.
When relief finally came last year with a more than 50% haircut in benchmark oil prices, the benefit came with a heavy cost to the economy, primarily to the fortunes of those deploying hydraulic fracturing processes. As a result, so-called fracking companies have taken some of the biggest hits among energy stocks.
Fracking, or the process of utilizing a highly pressurized mixture of water, sand and chemicals to extract gas and oil from shale rock hidden deep beneath the earth’s surface, is a highly controversial subject. Environmentalists are concerned about the effects of contamination from the exotic fracking mixture, as well as evidence that such methods lead to tectonic instability.
But fracking companies have also contributed to the economy in not only the jobs they have directly created, but in making the U.S. the world leader in oil production, according to Bloomberg Business. And a robust oil market — even if it means rising oil prices — is arguably worth the cost, considering the broad investment dollars spent on energy stocks.
Given weak economic data domestically — most conspicuously in the lackluster labor market — deflated oil prices are not deflated enough to overcome its associated consequences. Reduced demand has not only negatively impacted Big Oil, but has virtually crippled formerly budding fracking companies.
Why pay more for exotically created oil when the regular stuff is on a steep discount?
That’s the question investors will be asking of the following three energy stocks.
Dead-End Fracking and Energy Stocks: Market Vectors ETF Trust (FRAK)
As the only currently available exchange-traded fund covering fracking companies, the Market Vectors ETF Trust (FRAK) is at great risk of turning into a zombie ETF, or an investable fund on life support due to low dollar asset value and severely declining volume.
Aside from terrible figures from both the aforementioned criteria, the FRAK ETF is down more than 30% from its inception.
Fundamentally, however, it all comes down to cost for the FRAK ETF. According to research conducted by NPR, the cost of hydraulic fractured oil is averaged to about $62 per barrel.
With Brent Crude Oil prices currently hovering just slightly north of $50, traditionally processed “black gold” is sold at a 19% discount — and without some of the nasty controversies attacking fracking companies.
Even worse, some Middle Eastern countries can produce oil at $30 per barrel or less, further reducing the incentive of fracking, and thereby, investing in the FRAK ETF.
It comes as no surprise that the technical prognostication for the FRAK ETF is quite poor.
Year-to-date, the fund is still underwater by 20%, despite jumping nearly 19% over the past three weeks. Sandwiched in between its 50- and 200-day moving averages, the FRAK ETF has a long way to go before investors would begin to take even a mild consideration of the opportunity.
So long as benchmark oil prices and energy stocks remain in the doldrums, there are few, if any, rational reasons to invest in the FRAK ETF.
Dead-End Fracking and Energy Stocks: Basic Energy Services, Inc (BAS)
In business since 1992, oil drilling company Basic Energy Services, Inc. (BAS) has made significant investments toward the fracking industry over the years.
But with BAS stock down more than 73% since Oct. 20, 2014, management may be ruing that decision. With the only signs of life coming from speculative bursts based on the wild swings within the underlying oil markets, those who choose to invest in BAS stock are in for a euphemistically memorable ride, to say the least.
All the evidence needed to support the bearish position is in the financial records. Over the past 12-months, both revenue trends and growth in earnings before interest, taxes, depreciation and amortization skidded into the red.
Operating margins and net margins are also negative by 5.54% and 7.18%, respectively, with the two figures lagging the average performance of energy stocks.
One of the biggest concerns, though, is the cash-to-debt ratio of a meager 10%, which is ranked lower than 79% of the already embattled energy stocks.
The technical picture accurately describes the state of most fracking companies.
BAS stock is down nearly 45% YTD after failing to hold the momentum gained between the beginning of January until the end of April — otherwise, we could have been singing a different tune since BAS stock would have been up 47%. But the sickeningly rapid erosion that ensued is the trap that has become part and parcel of fracking companies.
BAS stock is essentially a daytrader’s pet project — don’t expect to make this a long-term commitment without getting severely burnt in the process.
Dead-End Fracking and Energy Stocks: Seventy Seven Energy Inc. (SSE)
The past year has been cruel for energy stocks, a sentiment shared acutely by investors of Seventy Seven Energy Inc. (SSE).
The curiously named energy services company will need nothing short of a miracle of Biblical proportions to reverse SSE stock’s ugly trend in the markets.
Its one-year return is a dismal 91% loss — ugly even by the low standards set by fracking companies — and at a share price of less than $2, there’s surely a de-listing by the New York Stock Exchange in the not-so-distant future.
The fundamentals are so horrible that there’s no reason to list them other than for posterity’s sake. Revenue growth and EBITDA growth averages losses of 23.5% over the past 52 weeks. Operating margins and net margins are essentially on-par with the negative rates found in BAS stock.
However, SSE stock’s return on equity is an eye-popping negative 47%, placing it inside the bottom 10% of energy stocks. Another dubious figure is the cash-to-debt ratio — at 7%, SSE stock is ranked 86% below its competitors.
Technically, SSE stock has only continued to add to its pain in recent trades. Shares are down more than 75% YTD, the result of a bearish trend channel following a tight consolidation pattern that ended abruptly on June 24.
Even more disconcerting, SSE stock has failed to latch on to the mini-recovery in oil prices. Whereas the benchmark Brent index is up more than 10% since Aug. 24, SSE stock is down more than 40%.
The dichotomy between the sharp misfortune of energy stocks and the even sharper losses incurred by SSE stock is the final nail in the coffin — invest at your own peril!
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.