Image source: Getty Images.
Continue Reading Below
What: Just when investors thought it was safe to go back into the waters of the oil market, building inventories of refined product and crude sent oil prices plunging today and taking exploration and production stocks with them. As of 3 p.m. EDT, WPX Energy (NYSE: WPX), Cobalt International Energy (NYSE: CIE), EP Energy (NYSE: EPE), Oasis Petroleum (NYSE: OAS) and Baytex Energy (NYSE: BTE) had all traded down as much as 10% today, and all of them are shaping up to see close to, or more than, double-digit declines by the end of the day.
So What: Whenever oil prices drop precipitously in a single day, it's almost a given that you will see these stocks on a list of stocks that move 10% that day. There are a couple reasons for that.
For Cobalt and EP Energy, the two companies are carrying larger-than-normal debt levels. These companies are at some credit risk if oil prices remain low for long.
For others such as Oasis and Baytex, the majority of their production comes from places where the crude they sell is in geographically disadvantaged areas, which get price realizations even lower than the spot market. In the last quarter, Oasis' average realized price for a barrel of oil was only $28, compared to the $40-$50 per barrel range we saw for spot prices in much of the second quarter. As inventories of oil build, places with disadvantaged crude will see the spread between the spot price and their realized price widen.
Data source: S&P Global Market Intelligence. Chart by author.
Then there is the simple fact that all of these companies are wholly dependent on oil prices to make a profit. A couple still have some futures contracts in place to protect oil prices, but most of those are drying up fast. If oil were to drop below $40 a barrel and stay there a while, it would be extremely hard for any of these companies to keep the lights on.
Now What: Commodity markets rarely move in a linear fashion, and this recent dip back to $40 a barrel is proof of that. This recent dip doesn't change the longer-term thesis of oil prices. Even though some companies are trying to hold or take market share, too many others are losing money at today's prices for prices to last at this level forever. At the same time, though, these fits and starts in the oil recovery can last longer than some would expect or hope, so investors looking to benefit from the long-term recovery need to be ready to handle these temporary blips.
For the individual stocks here, the biggest question is how well suited they are to handle another lull in oil prices.
A secret billion-dollar stock opportunity The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.
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.