For patently obvious reasons, the oil and gas industry has been one of the hardest hit during this pandemic. But with so much negativity, there’s a case to be made for going against the grain. That’s one of the reasons that investors have eyeballed Callon Petroleum (NYSE:CPE). Since closing at 41 cents multiple times throughout March and April, CPE stock is now trading above a buck. Should contrarians take a shot?
Comparatively, I can appreciate why Callon is so appealing among independent oil and gas names. While the independent names have been gutted relative to the majors, CPE stock banks on a familiar argument: it’s residing in the best house of the worst block. Further, with state governments making a concerted effort to reopen despite the risks of the novel coronavirus, Callon potentially represents a significant discount.
As well, it’s not just empty talk driving this narrative. Primarily, the oil firm historically has strong operating and net margins, well above the average for the industry. When you look at companies like Occidental Petroleum (NYSE:OXY) or even worse, the bankrupt Chesapeake Energy (OTCMKTS:CHKAQ), it’s hard not to have your interest piqued a little.
Plus, you have to figure that at some point, things will get back to normal. Though the nationwide shutdowns have quieted our collective type-A personality, we need to get back to work. In addition, small businesses, the engine of the U.S. economy, can’t survive with this artificially reduced demand platform.
With a strong June jobs report – where the economy added 4.8 million jobs – in tow, along with reassurances that we won’t go back to another national lockdown, CPE stock looks good. However, appearances can be deceiving.
CPE Stock May Be Due for a Reality Check
Recently, I received an email alert from our own Louis Navellier. During this crisis, he’s made bold buy calls that have turned out ridiculous profits because, you know, he’s Louis Navellier! So when he warned InvestorPlace readers about stocks to sell, it caught my attention.
At the same time that Navellier was sounding the alarm, new daily infections in the U.S. have reached worrying levels. On Wednesday, July 1, the country recorded over 51,000 new coronavirus cases. The following day, the tally breached the 55,000 mark, a truly staggering figure. Therefore, it wouldn’t be surprising to see CPE stock fade due to demand destruction fears.
However, I want to be as fair and objective as possible regarding this new outbreak. Out of the hot spots, four states have arguably captured the most media attention: Arizona, California, Florida and Texas. Because these states are economic powerhouses, increasing infections there could pose serious problems for CPE stock.
Yet when you look at the situation from the perspective of cases per million (CPM) residents, you’ll find some reassurances. Nationwide, the average CPM is 7,390. Both Texas and California are below this at 6,313 and 6,270, respectively. Florida isn’t too bad at 7,874, while Arizona is the most elevated at slightly over 12,000.
But another important factor to consider is the deaths per million. Here, all four hot spot states are well below the national average of 325.
So, does that mean Callon is a buy? Unfortunately, we just don’t know how this virus will react. The stats above are taken as of early July. By the end of this month, we could be staring at a new reality. Also, I’m not comfortable gambling with an asset that’s exposed simultaneously to both pandemic and economic risks.
Callon Is a Casino
If you check out the Transportation Security Administration’s screening numbers, you’ll notice that airline passenger volume has been ticking up significantly since its April lows. Back then, volume was in the single digits relative to their year-ago levels. Now, we’re looking at about a quarter of 2019 stats.
That’s wonderful from a small numbers comparison. But you’re still talking about a fraction of last year’s air travel demand. When you look at live traffic data in automotive metropolises like Los Angeles, traffic is again a small portion of what it was in 2019.
You couldn’t get a clearer indicator that demand was decimated before travelers had a chance to digest the latest coronavirus news. My worry about CPE stock and other oil-based investments is that people will voluntarily abstain from unnecessary journeys. After all, why risk being inside a Petri dish if you don’t have to?
Don’t get me wrong – I understand that Callon has better financial comparables than its rivals. If you must bet, place a small, calculated wager. Just don’t expect me to join you at this time.
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.