Those on the other side of the table can scream all they want — crude oil is in paradigm-shifting trouble. A cursory look at the benchmark oil prices gives you all the data you need to know. West Texas Intermediate fell below the all-too-critical $30 level for the first time since it broke triple-digits. The international index, Brent Crude Oil, is not too far off, hanging onto the $31 level by the skin of its teeth.
To put matters into perspective, this is the worst rout in the oil markets since the turn of the century — worse even than the energy collapse of 2008. Back then, oil indices dropped sharply amid the panic in global financial markets, only to begin a march upward within a few months. In the current oil crisis, spot prices have been deflating since July 2014. Worse yet, there is little technical evidence to suggest a recovery is in the works.
Oil bulls — if there are any remaining — also face several fundamental challenges. It’s no secret that Iran and Saudi Arabia have deep-seated historical rivalries that have been pushed to the brink with the latter’s execution of a prominent Shia cleric. And as U.S. ties are warming with Iran, the nation with the world’s fourth-largest oil reserves has every incentive to open its doors to business. More oil means less demand — great for the consumer, not so great for the producer.
As is usually the case, the worst affected among oil stocks are the independent names. While Big Oil companies such as Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX) can rely upon their extensive business portfolios and enviable cash reserves, smaller competitors simply don’t have the liquid asset base. Such companies also tend to be specialists within the broad oil industry, and are therefore more vulnerable to spot price volatility.
Unfortunately, those weaknesses aren’t going away any time soon. Independent oil stocks have become a ticking time bomb, and these three in particular are names you want to avoid.
Against specific barometers, ConocoPhillips (COP) appears to be one of the better opportunities among independent oil companies. COP was able to meet or exceed earnings expectations for the first three quarters of fiscal year 2015. In addition, COP secured an agreement with the U.S. Department of Energy to begin exporting liquefied natural gas from its Alaskan production terminal. Not only will this help contribute to the U.S. becoming a net exporter of natural gas, there are hungry customers waiting in the wings.
But, will this boost be enough to lift investor sentiment toward ConocoPhillips? Although natural gas makes up the majority of COP’s production mix, profitability margins have been extremely stressed since the end of FY2014. This is the case in spite of a 14%year-over-year reduction in operating costs in Q4. Furthermore, COP has reduced annual capital expenditures by 41%, yet free cash flow has been deep in the red over the past seven consecutive quarters. No matter what management throws at the fire, it just keeps growing.
From a technical perspective, COP stock is dreadful. At nearly a 32% loss year to date, you would assume things couldn’t get worse. However, all bets are off when it comes to the oil markets. Currently, COP shares are trading hands at market valuations not seen since January 2009, mere months following the global economic crisis. There is simply no bottom to this stock right now, and heightened volume levels tell us that investors can’t get out fast enough.
The markets have spoken — don’t try to catch a falling knife with COP stock!
Chesapeake Energy Corp.
It’s time to call the coroner — Chesapeake Energy Corporation (CHK) is done for good. What was once a very respectable, mid-tier oil and gas producer has intractably succumbed to virtual pink sheet status. Yes, CHK stock is still traded in the New York Stock Exchange, but let’s be frank — it’s only a matter of time before the company is de-listed. From there, only someone afflicted with terminal lunacy would consider picking up CHK stock.
Where to begin with the troubles? According to CHK stock’s Altman Z-Score ranking, Chesapeake is considered distressed. This is hardly surprising, given that its operating and net margins are averaging -98% over the trailing twelve months. Administrative expenses have come sharply down over the past several years, and capital expenditures are roughly one-third of what they were in 2010, but it’s too little, too late. CHK stock’s fundamentals are a gaping wound, and nothing short of an oil market miracle will save it.
Of course, the most pronounced challenge for Chesapeake is its technical momentum, or lack thereof. CHK stock is down a mind-boggling 60% YTD, with shares continuing to hit fresh lows. In fact, insider trading records show extensive losses, which must make for fun board meeting conversations. Adding to the pain is that recent volume is nearly double that of CHK stock’s trailing three-month average. Again, no one can get out fast enough from this tumbling house of cards.
If insiders can’t make money off of CHK stock, it would be a near impossibility for anyone else to accomplish the feat.
Anadarko Petroleum Corp.
Among the battered and bruised oil stocks featured on this list, Anadarko Petroleum Corporation (APC) is actually the strongest performer — not that this would give long-term APC stockholders much comfort, given the dramatic reversal of fortune the oil exploration company has seen in the past year. Adding to their woes was another unwanted headline earlier this week, with Anadarko announcing an 81% cut to its quarterly dividend.
With passive income potential so drastically curtailed, there doesn’t seem to be much incentive in taking a risk on APC stock. Despite besting many of its rival oil companies, APC stock is still down 27%. It also absorbed some heavy losses in the markets this week as Wall Street took an especially dim view on Anadarko’s dividend slash. Average volume for APC stock climbed to 13 million shares over the past three days, which is up some 38% over the trailing three months.
Few can blame APC stockholders for running for the exits. The usual suspects of negative profitability margins and dreadful cash flow are clearly at work here. But what makes Anadarko dubiously stand out is its response. Generally speaking, the company’s capital expenditures are excessively high based on the money coming in. Furthermore, Anadarko has had less success controlling its day-to-day expenses than many of its peers.
While APC stock may earn the title of the best house in the worst neighborhood, the bottom line is that it remains a terrible investment.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.