Oil stocks have been all over the place in recent weeks. Prices for crude oil are trending upward, leading many investors to believe now is a good time to buy. But rising oil prices won’t necessarily translate into big gains for many energy firms.
And they may put a crimp on the dividends that bring many investors to the sector.
“Dividends are at the greatest risk of being cut or eliminated in those sectors of the economy that have been impacted the most by the lockdowns and social distancing,” wrote Clinical Professor of Finance David Kass of the University of Maryland’s Robert H. Smith School of Business in an email to InvestorPlace. “… The sharp worldwide drop in demand for oil, including gasoline for cars and jet fuel, has reduced oil prices below the breakeven point of many oil companies, thereby jeopardizing their dividends.”
The current environment is challenging to say the least. No one is sure whether or not the novel coronavirus will continue to zap demand for oil, and a supply glut is likely to exist for the foreseeable future. As Sang Baum Kang, an associate professor of finance at Illinois Institute of Technology’s Stuart School of Business wrote in an email to InvestorPlace, “Because of COVID-19, demand for oil is lower than before. Oil production firms (SIC code=1311) may be affected by low spot price of oil. There are two types of firms with SIC=1311: pure oil production firms and diversified oil firms. The former may be affected more. ”
The bottom line is that as long as supply exceeds demand, oil companies are in trouble.
Big names with powerful balance sheets will feel pain, but those with even shakier finances will struggle more. With that in mind, here’s a look at four oil stocks to sell now.
- Occidental Petroleum (NYSE:OXY)
- Marathon Oil (NYSE: MRO)
- Halliburton (NYSE: HAL)
- Chesapeake Energy (NYSE:CHK)
Oil Stocks to Sell: Occidental Petroleum (OXY)
Occidental Petroleum was in a precarious position before oil prices went negative in April. And since then, the energy firm just keeps digging a deeper hole.
The company has been struggling with a massive $38.5 billion debt pile — and its plan to sell assets in order to pay it off is failing miserably.
Occidental planned to bring in $5 billion by selling assets in Algeria and Ghana, but the Algerian government killed the deal. In the wake of that news, OXY has been exploring other ways to cut down on its debt obligations. So far, it hasn’t had any luck.
Selling off assets just to stay afloat is never a good sign, making OXY stock a poor choice in the oil and gas sector.
Marathon Oil (MRO)
Marathon has pulled off an impressive rally over the past few days. MRO stock managed to gain 43% since the beginning of April. That’s in large part due to investors’ belief that oil is on the road to recovery.
Notably, Marathon is probably one of the best picks on this list because of its relatively strong cash flow and sizable untapped credit flow. But Marathon’s future is remarkably uncertain.
First, there’s the question of whether oil will recover as the market believes it will. But more specifically for MRO is the geopolitical risk. Many of the countries MRO operates in are in the midst of big political changes that could have ramifications for the oil and gas sector.
That’s going to be costly for Marathon to navigate, especially considering the firm is expecting to have a terrible second quarter. MRO stock’s impressive rally over the past few weeks has made the stock too risky considering the headwinds ahead.
Halliburton is another oil stock that simply isn’t worth the risk. The firm recently slashed its dividend yield from 6.5% to 1.6% in an effort to preserve liquidity and get through the challenges ahead. Management has also been working to cut costs in other ways, including layoffs and pared-down executive compensation.
It’s worth noting that management’s efforts have been valiant, but without a dividend to rely on, there’s very little reason to pick up HAL stock. The firm’s future prospects look muted at best as the industry continues to tread lightly on uncertain ground. Plus, Halliburton is buried under a $9.6 billion debt obligation. That’s a worrying debt-equity ratio of 141.
The bottom line is that without some kind of compelling catalyst on the horizon, HAL stock just looks like a lot of risk without much reward.
Chesapeake Energy (CHK)
Like many others on this list of oil stocks, Chesapeake was already struggling before oil prices crashed in April. The firm was already highly leveraged and its first-quarter losses exceeded the firm’s market capitalization.
CHK stock investors likely have the stomach for volatility, and the firm has a history of taking risks. But this time it seems the situation could be a bit more dire. Chesapeake management admitted that the firm may not make it through the pandemic without filing for bankruptcy in early May.
What’s worse, this isn’t the first time CHK has warned of bankruptcy, suggesting the firm has been teetering on the edge of Chapter 11 for several quarters. The novel coronavirus could be the final push that tips Chesapeake over the edge.
Laura Hoy has a Finance degree from Duquesne University and has been writing about financial markets for the past eight years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.