This Is What's Fueling Seventy Seven Energy Inc.'s 10% Drop

By Markets Fool.com

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

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What: Seventy Seven Energy Inc.'s stock fell 10% on Tuesday as the oil-field service company's wild ride continues. The stock has been hyper-volatile over the past few months as it has been driven by the volatility in the oil market. Oil had been rallying over the past few days, but that rally is fading today as the price of crude was down about 4%. This is after bearish comments from analysts suggesting the recent oil price rally might not last, as the oil market is still very much oversupplied.

So what: Seventy Seven Energy's stock is going to be volatile when the price of oil makes a big move, for two reasons. First of all, its business is levered to oil and gas development, which is tied to the price of oil. So, when the price of oil dips, it suggests that Seventy Seven Energy's business could dip as well, because energy companies will likely drill fewer wells and require fewer services from Seventy Seven Energy. On top of that, the company has a lot of debt on its balance sheet and that leverage causes big moves in the stock as investors worry that a continued weak oil market could cause liquidity issues down the road if drilling activity doesn't improve.

Now what: All that said, today's move is largely meaningless. The stock is selling off after gaining more than 20% over the past few weeks just because of the price of oil. This tells us the stock will continue to be very volatile until the oil market settles down into whatever the new normal ends up being.

The article This Is What's Fueling Seventy Seven Energy Inc.'s 10% Drop originally appeared on Fool.com.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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