June has been an interesting month for Occidental Petroleum (NYSE:OXY) shares and we’re only halfway through. Six days of gains, four retreats and OXY stock heads into the balance of the month some 44% above where it started.
That would be notable if we were talking virtually any other company. But this is an oil stock. And one that had already lost 45% over the past five years, before tanking from the combined effects of an oil price war and the novel coronavirus pandemic.
To put it in some perspective, after last week’s run, OXY closed at $24.40 on June 8. Five years before that, it was trading at over $77. Shares were going for more than $47 just a few months ago. So we are talking a long way to go before anything resembling a recovery, or even stability.
So, don’t be tempted to snap up OXY, thinking now is a great time to get the stock before it bounces back.
The Oil Business is on Shaky Ground
The novel coronavirus has been the big news in 2020, but for oil companies the pandemic was made even worse by a price war. When Saudi Arabia and Russia went toe-to-toe, oil prices crashed to historic levels, dropping below $20 a barrel. In 2019, a barrel of oil averaged $64.
The oil price war happened just as demand tanked. With a Covid-19 lockdown in effect, airlines cut flights and stay-at-home workers stopped driving. Factories shut down. Supertankers around the world were anchored with holds filled with oil that no-one wanted.
At the height of the panic, OXY stock dropped almost 80% from its previous 2020 high. Other oil stocks were hammered as well. Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) both saw their shares’ value more than halve. In April, shale oil company Whiting (NYSE:WLL) declared bankruptcy.
The Future Doesn’t Look a Whole Lot Better
Recovery of oil demand depends on a global economy that recovers from the coronavirus. At this point, we don’t know how soon that will happen. Without a vaccine, things are not going to return to normal any time in the near future.
In addition, climate concerns and demands to take action are ramping up. Fossil fuels are public enemy number one. Electric cars are getting closer to mainstream adoption. As that fleet increases, the demand for gasoline will decline. At the same time alternative energy sources for power, such as wind and solar continue to gain momentum.
The CEO of UK petroleum giant BP (NYSE:BP) recently mused that world may already have passed “peak oil demand.”
According to U.S. Energy Information Administration projections, crude oil prices should recover to $48 per barrel in 2021. July crude is around $36.50.That puts oil prices in the foreseeable future well below 2019 levels — which in turn, were below 2018 prices. This is not a good trend if you’re invested in the oil industry.
Occidental is Loaded With Debt
In 2019, Occidental made a big movem paying $55 billion to buy rival Anadarko Petroleum. The plan was to gain control of Anadarko’s U.S. oil and gas reserves, and sell its other assets in time to pay off debts — including a $6 billion payment that comes due this year.
The timing couldn’t have been more wrong on this deal. With the oil market in the dumpster, those overseas assets aren’t worth nearly what Occidental had hoped they fetch, if the company can even sell them at all. The company is now sitting on a total of $39 billion in debt, which has been downgraded to junk status.
Bottom Line on OXY Stock
Oil stocks have been a tough sell for several years, and they’re riskier than ever right now. That’s why I recently published a list of “7 Sinking Oil Stocks Investors Should Avoid.” It should come as no surprise whatsoever that Occidental Petroleum features prominently on that roster.
Occidental faces a confluence of challenges that are virtually insurmountable. Oil prices prices remain near historic lows, demand for gasoline and jet fuel remains low, we’re in the early stages of a recession (that’s liable to keep both prices and demand down for an extended period of time) and alternative energy solutions including electric cars are gaining momentum. We may have hit peak oil demand, spelling a gloomy future for oil companies.
Add in its high debt load, and there’s not much to like about OXY stock. Despite its recent spike, it still gets an F-rating in Navellier’s Portfolio Grader and remains a stock investors should avoid.
Brad Moon has been writing for InvestorPlace.com since 2012. He also writes about stocks for Kiplinger and has been a senior contributor focusing on consumer technology for Forbes since 2015. As of this writing, he did not hold a position in any of the aforementioned securities.