Why August Was a Bad Month for Oil Drillers

Markets Motley Fool

What happened

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Shares of many oil exploration and production stocks dropped more than 14% in August, including Parsley Energy (NYSE: PE), down 14.3%; Sanchez Energy (NYSE: SN), down 14.6%; Concho Resources (NYSE: CXO), down 15.1%; Noble Energy (NYSE: NBL), down 16.4%; and Pioneer Natural Resources (NYSE: PXD), down 20.8%.

This was in a month when the S&P 500 was basically flat, losing just 0.2% in August. The oil and gas exploration and production industry as a whole -- as measured by the SPDR S&P Oil & Gas Exploration & Production ETF -- fell just 6.6%. The largest U.S. independent oil and gas driller, ConocoPhillips, closed the month with only a modest 2.4% drop. So these five stocks were definitely worse off than average. Let's look at why.

So what

In most of these cases, earnings reports were to blame. Despite reporting better-than-expected earnings and high production on Aug. 2, Pioneer lowered its production guidance, citing drilling delays, which led the market to punish the stock. Parsley Energy and Concho Resources likewise reported positive earnings, and increased their guidance for the year, but the market punished them anyway because of their large stakes in the Midland Basin, which is turning out to have a worse-than-expected production mix of more gas and less oil than previously thought. Revenue was up for Noble Energy, but the company recorded a $2.3 billion loss on a Marcellus Shale divestiture, turning what would have been a small quarterly profit into a huge quarterly loss and sinking the company's share price.

Adding insult to injury for the entire sector, crude oil prices had a rough August, which is never good for oil drillers. A barrel of WTI crude started the month at $50.30 but dipped as low as $45.58 before coming to rest at $47.23 to close the month. Brent crude fared somewhat better, both opening and closing the month at $52.86, but it spent virtually the entire time below that level, only jumping back up on the last day of the month. 

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Hurricane Harvey fears may have also played a role. Sanchez Energy -- the only company in this group whose stock rose in the wake of its earnings report -- saw a significant drop in the week leading up to the storm, as its operations are exclusively located along the Gulf Coast. On Aug. 28, the company put out a statement saying that its Eagle Ford operations had sustained only minimal damage from the storm, and the stock climbed just in time to save it from a worst-in-class finish for the month. 

Now what

2017 has been a rough year for oil companies in general, as prices remain mired around the $50 range. And without downstream (refining and selling) operations to offset their more vulnerable upstream (exploration and production) operations, these five companies have all seen their shares drop between 15.9% (Concho) and 53.1% (Sanchez) this year. Expect this trend to continue.

Furthermore, these companies' balance sheets are all loaded up with long-term debt. Most of them don't have much cash on hand to offset it. Parsley Energy, with $502.6 million in cash against $1.5 billion in long-term debt, and Concho Resources, with $662 million in cash against $2.7 billion in long-term debt, are the exceptions.

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John Bromels has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.