The oil patch has always been a boom-and-bust business. But things haven’t been this bad since the early 1980s.
Back then the President Ronald Reagan-era alliance with Arab oil states against Russia sent prices from over $100 per barrel in 1980 to $30 per barrel by 1986, devastating Houston’s exploration companies, refiners, equipment makers and the services sector.
The latest plunge, which took prices from $42 to below $30 in a weekend, hit a sector already battered by the high capital costs of fracking. The value of producers fell by one-third to one-half, service companies by one-fifth to one-third, and refiners dropped 10%-20%. Even mighty Exxon Mobil (NYSE:XOM) dropped 12%, to under $42 per share. It sold for $82 per share last March.
On March 10 the bargain hunters were finally out in force. But will they will find anything worth buying?
You don’t want to be a producer.
Many oil producers were already being called “dead men drilling” before the price collapse, because they were barely able to keep up with their loans. Whiting Petroleum (NYSE:WLL), the “King of the Bakken” play in North Dakota, dropped below 80 cents, a market capitalization of just $65 million. With $2.8 billion in long-term debt, and less than $1.6 billion in revenue for each of the last two years, the only question is why anyone took it to 95 cents overnight.
Occidental Petroleum (NYSE:OXY) ended Monday with a market cap of $11.2 billion, after paying $55 billion for Anadarko just last August. Even premier Permian producers like EOG Resources (NYSE:EOG) and Pioneer Natural Resources (NYSE:PXD) were down by one-third.
The exception was Cabot Oil & Gas (NYSE:COG), a gas producer that closed higher as two analysts upgraded it due to its low production costs. Cabot earned $681 million in 2019 on revenue of $2 billion and natural gas prices are relatively steady.
The Big Guns
The bargain hunters were out in force among the integrated oils, which offer international production, refining and trading. Exxon Mobil recaptured two-thirds of its March 9 loss overnight, thanks to a dividend yielding over 6.9%. Chevron (NYSE:CVX) recaptured one-third of its loss on a yield of over 6%. I am more positive on it than Exxon because it’s committed to its payout.
The European oil producers are even bigger yield traps. Total (NYSE:TOT) of France yields 6.7%, and BP (NYSE:BP) over 9.8%. But both may have to break into their cash vaults to make those dividend payments.
The Service Sector
Some of the worst performers were in the services sector, whose technology drove the boom but who look unnecessary in the wake of the bust.
Halliburton (NYSE:HAL) dropped 37% but gained back only 11% overnight. The market cap is down to $7.3 billion on 2019 revenue of $22.4 billion. Schlumberger (NYSE:SLB) dropped 27% but gained back 9% overnight, a market cap of almost $25 billion on revenue of $33 billion. Baker Hughes (NYSE:BKR), now independent of General Electric (NYSE:GE), dropped 22%, although its debt level of $6.3 billion is modest against a cash balance of $3.2 billion.
The Bottom Line on Oil Stocks
The only part of the sector not overrun by the bears were refiners whose names decorate service stations.
Valero Energy (NYSE:VLO) lost just 7.5%, but gained nearly all of it back overnight. Marathon Petroleum (NYSE:MPC) got back half of its 13% loss overnight. This came after Japan’s Seven & i Holdings (OTCMKTS:SVNDY), which owns the 7-Eleven convenience store chain, scrapped a plan to buy its Speedway gas stations for $22 billion. That’s the equivalent of its March 10 market cap.
Marketers could benefit from the oil crash, dropping prices slowly and adding visitors who will also buy candy, cigarettes and food. Most of the best-run chains, like Buc-ee’s in Texas and Wawa in Pennsylvania, are privately held, But Casey’s General Store (NASDAQ:CASY) is publicly traded. It barely budged and is up 8% so far in 2020.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.