Despite top-level reassurances, Wall Street ducked for cover to start the mid-March session. With the major indices seeing red across the board, the most vulnerable industries suffered the hardest. And that’s really the only positive thing I can say about energy firm Apache (NYSE:APA). In just one day, APA stock dropped over 32%. On a year-to-date basis, shares are down over 81%.
If you’re thinking about gambling on APA stock, I’d wait and reassess the situation. For starters, this company was already a speculative bet prior to the coronavirus from China weighing on virtually everything. For instance, in its most recent quarter ending Dec. 31, 2019, revenue slipped to $1.625 billion from $1.7 billion. Additionally, the energy firm’s balance sheet is heavily laden with debt, which limits management’s expansionary options.
However, the overwhelming headwind comes from the clash of the oil titans – Saudi Arabia and Russia. You’d be hard pressed to find a pair more universally looked down upon with suspicion at best and outright animosity at worst. Still, their huge oil reserves make them relevant, and so the rest of the world plays along. And in this paradigm, investments like APA stock at least had a fighting chance.
But now, this paradigm has ruptured. A once-tricky partnership has devolved into a price war after Russia rebuffed Saudi Arabia’s proposal for cooperative production cuts. Theoretically, an output constraint would help all oil-exporting nations. However, the New York Times’ Andrew Higgins and Andrew E. Kramer pointed out that Rosneft (OTCMKTS:OJSCY) head and strongman Igor I. Sechin benefitted most from the fallout.
In other words, Russia wasn’t going to sacrifice its own economic interests, irrespective of oil prices.
APA Stock Caught Flatfooted
Interestingly, Russian President Vladimir Putin and his administration may have miscalculated Saudi resolve. According to the NYT journalists:
With hundreds of billions of dollars salted away in rainy-day funds, Russia is in many ways unusually well-positioned to withstand the impact of falling oil prices. But it has nonetheless been rattled by how fast and aggressive Saudi Arabia has been in responding to the breakdown of talks in Vienna.
If what the Times is implying is true, Putin assumed the Saudis would back down. Though both Putin and his Saudi counterpart Crown Prince Mohammed bin Salman are stubborn tyrants, they have clear economic interests in maintaining at least a working relationship.
After all, why else would you go to either countries? They can talk economic diversification all they want – they’re still largely energy exporters.
So yes, it must have been incredibly jarring to the Russians for the Saudis to cut off their nose to spite their face. In response to Russia’s rejection, the Saudis unleashed their spigot. Further, they’re promising to unload even more oil, especially to Europe, Russia’s longtime client. As long as cheap, abundant oil runs freely, multiple segments within the global energy industry will implode.
Now, I’m not suggesting that APA stock will drop to zero. However, I’m not sure where the underlying company will make up its losses given the tumultuous environment. As I said earlier, Apache is not the most stable organization in the energy sector. Unfortunately, it’s just not built to withstand a painful war of attrition.
Let’s not forget that the U.S. doesn’t exactly have a favorable relationship with Russia. So, both primary combatants in the oil wars have political incentives to continue fighting. Obviously, that’s not great for APA stock.
Nowhere to Run
But perhaps the biggest challenge for Apache is this: even if Saudi Arabia and Russia kissed and made up, that only resolves the supply component. It does nothing to address demand.
And if we’re being completely honest, that’s the real issue. Indeed, the U.S. Federal Reserve proved it to the world recently when they slashed interest rates to near zero. What did that do to demand? Nothing. As you know, the markets suffered one of the worst single-day declines in history.
What that red ink indicates is that both the American and global consumer is not spending, driving, flying, boating, or any number of other expense-driven activities. Without their economic movement, the Saudis and the Russians can cut supply to zero for all I care.
Bottom line: this is just an ugly mess that could get uglier. Thus, APA stock is a falling knife that will only increase in velocity as gravity has its way. Until we get a substantive improvement in market sentiment, stay away from Apache.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
