Since the end of last week, crude oil prices have hit a snag, ending a six-day winning streak. The international benchmark Brent Crude has fallen 2% from Friday, while West Texas Intermediate absorbed a heavier blow, down nearly 4%. Of course, oil prices are hardly stable — it’s generally not good practice to read into every little blip. However, the energy markets have hit unusually poor circumstances, which spells trouble for many oil stocks.
The first and most obvious point is that there’s simply too much inventory. The latest read on supply is atypically high, especially since the summer season represents peak driving time. Logically, that will severely pressure oil prices. Even the threatened supply squeeze by the Organization of the Petroleum Exporting Countries won’t have the same impact as it did in previous years.
The other problem facing the world’s biggest oil producers is political. For multiple generations, Saudi Arabia and Iran have harbored cultural and religious tensions. The uproar over the execution of a prominent Shia cleric by Sunni-dominant Saudi Arabia has yet to be fully resolved, leading to a lack of consensus among OPEC members. Getting around that thorny issue won’t immediately solve matters for oil prices. Individual members have their own interests, which may not include a coordinated supply restriction.
As if those weren’t enough headwinds for oil stocks, we have to consider the domestic front. Brick-and-mortar retailers across the board are facing sales growth challenges and a dearth in foot traffic. You don’t have to be an economist to see the correlation. Fewer people visiting stores and making purchases equates to less time on the road. That in turn means fewer gasoline pumps pumping.
No matter which way you look, oil prices are at risk for further deflation. Here are three oil stocks that face significant threats from a possible downturn.
Struggling Oil Stocks: ConocoPhillips (COP)
Like so many oil stocks, shares of ConocoPhillips (NYSE:COP) have had a very mixed performance in 2016. On a year-to-date basis, COP is down 9.6%, thanks to January’s volatility that affected virtually every sector.
ConocoPhillips rallied promisingly between February and April, gaining 24% in the markets. However, since late April, COP trails behind by 11%.
Unfortunately, it’s difficult to see how oil stocks are going to make up for the shortfall resultant from a depressed industry. Revenue for COP is exactly halved from its total haul for fiscal year 2012. The latest read in the second quarter doesn’t do anything to reverse bearish sentiment, with the top-line dropping 36% year-over-year. As expected, profitability margins are deep into negative territory, while debt has significantly accumulated.
From a shareholder’s perspective, it’s even harder not to get discouraged on COP stock. In 2000, annual returns for COP averaged nearly 15%, even with the devastation of the 2008 financial crisis. So far this decade, average returns are at a measly 6%. By far, it’s the worst performance for COP, which has generated double-digit returns for each decade of its publicly traded existence.
It’s unlikely that COP will completely collapse from here on out. Nevertheless, there may be more rough times ahead.
Struggling Oil Stocks: Tesoro Corporation (TSO)
Pain among oil stocks is a feeling that Tesoro Corporation (NYSE:TSO) is all too familiar. TSO stock is down 30% YTD, the worst market performance of the three featured companies.
What makes TSO a particularly bad case is that it hasn’t had much of a relief rally. Day traders that timed the market between the end of February and the end of March made off with a 35% profit. Others were left hanging. Since March 24, TSO fell 20%.
The fundamentals won’t give you a better read. Sales for FY 2015 were off 29% from the prior year’s total. That just won’t get better until oil prices recover. In the latest Q2 report, revenue slipped 24% YOY, which means TSO still has a long road to recovery. Their profit margins are favorable, but enthusiasm towards that metric is offset by sharply rising inventory. Also, TSO has been digging itself into debt during the mass deflation in oil prices.
Unlike ConocoPhillips, Tesoro has seen worse days. During the 1980’s, TSO stock averaged a loss of 4% in annual returns. So far in this decade, TSO is looking at 30% — not bad at all considering the damage in oil stocks. The problem for future buyers is that upside potential appears to be capped. In the previous decade, there were three years where TSO registered triple-digit gains. This time around, there’s none, and 2016 looks like a lost cause.
It’s the kind of news that will weigh on investors when deciding what to do with TSO.
Struggling Oil Stocks: Sunoco LP (SUN)
Sunoco LP (NYSE:SUN) may be one of the more frustrating names among oil stocks. Yes, SUN stock is down 24% YTD, which will severely disappoint any investor. But more than that, it hasn’t gone in any direction decisively, causing bulls and bears much annoyance.
Although it’s an obvious statement, oil prices need to move higher for SUN stock to look attractive; Revenue growth in the first two quarters of this year average losses of 24%.
Problems for SUN are further exacerbated by rising supply. Day’s inventory in Q1 was 123%; in Q2, that figure jumped to 168%. Most worrisome on the balance sheet is debt, which skyrocketed to nearly 150% over a one-year period.
While some would say that it’s too early to judge SUN stock, you can easily read between the lines. Following its buyout by Energy Transfer Partners LP (NYSE:ETP), SUN has provided investors three years of consecutive growth.
However, if 2016 continues its general trajectory, shareholders would then look at two years of consecutive decline. On a long-term chart, SUN resembles an upside-down bowl, moving from rags to riches to rags.
That may look good in terms of symmetry, but as a potential buyer of SUN stock, that sends the wrong message.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.