This has been a year of environmental catastrophes. Over the weekend, we learned that this trend isn’t over yet as a major oil spill off of the Orange County coast resulted in significant damage to the Southern California coastline. According to the Wall Street Journal, an estimated 126,000 gallons were spilled between Newport Beach and Huntington Beach, covering roughly 6 miles. The environmental impact is still being assessed, but the damage to share prices of Amplify Energy (NYSE:AMPY), the company responsible, is quite clear. Shares of AMPY stock have been quick to react negatively.
What’s Happening With AMPY Stock
It is early in the day but the week is off to a very poor start for Amplify Energy, whose shares declined more than 50% in pre-market trading today. Since markets opened, the declines have continued.
The previous week saw AMPY stock steadily rise by over 16% before this morning’s sharp declines. September proved to be an excellent month, with shares rising by more than 54%. As it stands, though, October may indeed be a scary month for shareholders. The end of a nine-day streak of gains has been capped with a record selloff that is the direct result of an environmental disaster.
What It Means
There’s no good time for an oil spill, but this crisis comes at a highly inopportune time for Amplify. Its previous winning streak was due in part to commodity prices rising and in part to the type of general market optimism that happens when a company displays steady, consistent gains. When we see global power shortages and lower supply, it tends to generate demand that drives up the price of crude oil. That’s exactly what we’ve been seeing in oil markets.
This type of company-specific disaster is particularly bad for those responsible because it doesn’t do anything to affect the industry. Amplify’s much larger competitors are enjoying a day in the green so far, with Chevron (NYSE:CVX) rising by 0.81% for the day while Exxon Mobil (NYSE:XOM) is up by 0.75% and ConocoPhillips (NYSE:COP) by almost 2%.
Why It Matters
This is bad news for anyone with AMPY stock and there’s no positive spin to put on it. What we have here is a classic example of the hot-hand fallacy and a reminder of why it can be dangerous. It’s easy to be bullish when a commodity stock gets hot and begins a winning streak, especially when market demand is sky high. But for a company operating in a field like oil mining, random disaster can always be close by.
Can Amplify recover from this? Of course, but it will definitely take some time. Granted it is not likely that the demand for oil will decline by too much in the months ahead, but by the time AMPY stock is able to get back to where it was pre-spill, other companies will have risen more and grabbed more market share.
Investors have made it clear how they feel about AMPY stock. This isn’t a bad time to go long on oil stocks — far from it. It is, however, a terrible time to be bullish on a company in the midst of a crisis.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.