Just when it looked like things couldn’t get any worse for oil stocks, they did. In a big way.
Already reeling in February from falling demand in the wake of the novel coronavirus outbreak going global, oil stocks collapsed even further in early March on news that Russia and OPEC began an all-out oil price war. Many oil stocks are now down more than 50% year-to-date. A handful are down 90% or more in 2020.
The wipe out plunged many oil stocks into penny stock territory, with the implication being that bankruptcy is a real and likely option for many of these companies over the next few months.
That may not happen. There is a chance that COVID-19, which is spreading like wildfire today, actually starts to slow over the next few months as a coordinated effort from countries and businesses across the world to enforce social distancing helps stifle the disease.
Perhaps more importantly, there is a chance that Russia and OPEC end their price war soon.
“Saudis and other Middle Eastern producers have their budgetary constraints [and] Russia is starved for cash,” said Jonathan Barratt, chief investment officer of Probis Group. “So the dynamics of all those put together will mean they will come to an agreement somewhere.”
Oil demand trends could improve by summer 2020, while the supply glut could come down. If so, depressed oil stocks could rebound.
To be sure, buying penny oil stocks isn’t for the faint of the heart. I’m not doing it. If you’re a risk-seeking investor who thinks oil prices will bounce, however, perhaps consider buying these penny oil stocks:
Chesapeake Energy (CHK)
% Decline in 2020: 79.2%
Perhaps the most (in)famous penny oil stock out there is Chesapeake Energy (NYSE:CHK).
Chesapeake Energy is a U.S. shale oil producer that has been hit hard in 2020 on concerns that falling oil demand coupled with rising oil supply will cripple and eventually bankrupt this over-levered company. Year-to-date, CHK stock is down a whopping 79.2%.
That may happen. Chesapeake does seem to be out of time, out of money, and out of options.
But the bankruptcy thesis rests entirely on the idea that oil prices will remain depressed for the rest of 2020, leading to insufficient cash flows that aren’t big enough to service the company’s debt load. If oil prices rebound, Chesapeake’s cash flows will rebound, too, and likely to levels that are big enough to pay debt costs.
Gulfport Energy (GPOR)
% Decline in 2020: 85.3%
Oil and gas exploration company Gulfport Energy (NYSE:GPOR) is a penny oil stock worth considering for traders betting on a rise in oil prices. Relative to peers, the company has better near-term growth prospects, healthier cash flows, and a more manageable debt load.
Gulfport engages in both oil and natural gas exploration. But the natural gas component is the bigger one, accounting for about 75% of the company’s revenue last year. Natural gas prices should actually head higher in the near term, as the oil supply glut forces some producers to cut back on natural gas exploration as their budgets tighten.
That’s a win for Gulfport. It’s also a win that, unlike many other exploration companies, Gulfport was actually free cash flow positive last year, and that earnings before interest, taxes, depreciation, and amortization measured about $725 million. Those favorable financial features make the company’s $2 billion debt load look manageable.
Of course, if oil prices stay low, Gulfport’s cash flows and earnings will take a huge hit, and the company will likely spiral into bankruptcy. If oil prices rebound, the company will avoid bankruptcy, and GPOR stock will bounce back in a big way.
Nabors Industries (NBR)
% Decline in 2020: 87%
Alongside oil drillers, oil services stocks are also getting slammed. Case in point: Nabors Industries (NYSE:NBR), who provides rig and drilling technologies to the oil industry, has seen its stock drop 87% in 2020.
The rationale is simple. As oil prices plunge, many debt-heavy oil exploration and production companies will have to cut back on spending in a big way. E&P spend reduction will directly lead to lower demand for the type of stuff that Nabors sells.
So long as oil prices remain low, NBOR stock will remain depressed. If oil prices rebound, this stock will pop, too.
That’s because relative to peers, the company is fairly well capitalized with strong cash flows. Earnings before interest, taxes, depreciation, and amortization measured about $805 million last year. Free cash flow came in around $330 million. Both of those are above the company’s annual debt expenses, which are around $200 million.
Nabors is actually one of the financially more attractive companies in the penny oil stocks group. It’s still too risky for me. But, if you believe that oil prices will rebound in the summer, then NBOR stock could be an attractive way to play that thesis.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.