Slumping Crude Prices Caused Investors to Flee These 5 Oil Stocks in March
What happened
Thanks to the support of OPEC, oil prices were relatively stable in the low $50s for the first two months of the year. However, that changed last month, when crude slumped into the upper $40s on renewed oversupply concerns. That unexpected dive weighed on oil stocks, especially those that were relying on $50-plus oil to fuel their bullish drilling plans, which investors now fear might be tooaggressive. Among those stockshit the hardest were PDC Energy (NASDAQ: PDCE), Whiting Petroleum (NYSE: WLL), QEP Resources (NYSE: QEP), Carrizo Oil & Gas (NASDAQ: CRZO), Sanchez Energy (NYSE: SN).
So what
The plunging price of crude had the greatest impact on Sanchez Energy's stock, which slumped more than 20% last month. What spooked investors was that Sanchez recently spent more than $1 billion to bulk up on its Eagle Ford shale acreage. That deal positioned the company to achieve 10% compound annual production growth over the next three years, while also improving its financial metrics. However, Sanchez based those projections on higher oil prices, which might no longer be in the forecast. That had investors worrying that Sanchez might struggle if crude continued to slide.
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March was also a rough month for investors in Bakken Shale-focused Whiting Petroleum after the stock plunged nearly 17%. One factor weighing on the stock was that it unveiled a bold capex budget at the end of February, planning to double spending to drive a 23% increase in production by the end of the year. That said, the company based its budget on $55 oil, which appears to be overly optimistic. That's one reason analysts at UBS downgraded the stock last month from neutral to sell, citing the company's decision to outspend cash flow as a greater risk given that it has $1.5 billion in future debt maturities to address. These factors make it one of the most likely drillers to scale back its drilling plans if crude doesn't improve.
Carrizo Oil & Gas is another shale driller that as an elevated leverage ratio, which puts its ambitious growth plan at risk should crude prices remain weak. Overall, the company is targeting 20% compound annual oil growth over the next three years. However, it needs higher oil prices to give it the cash flow to make that plan work. That said, analysts didn't share the market's worries last month as Williams Capital and Seaport Global both upgraded it to a buy, citing its recent sell-off as a buying opportunity. Both like its strong position in the Eagle Ford and see a potential catalyst in its Delaware Basin acreage, where Seaport believes it could make an acquisition to boost its growth prospects.
Image source: Getty Images.
Meanwhile, analysts seemed to play a role in PDC Energy's slump last month. Both Tudor Pickering and UBS initiated coverage with a hold and neutral rating, respectively, while BMO Capital Markets reiterated its hold rating. Analysts seem concerned with the fact that PDC Energy plans to spend up to $775 million this year -- about $200 million more than projected cash flow -- on an aggressive plan to boost production by more than 40%. The concern is that if PDC Energy and its peers produce too much, it could cause oil prices to keep falling, which would lead to a larger outspend and weaken the company's credit metrics.
Analysts also weren't that enthusiastic about what lies ahead for QEP Resources. UBS, for example, initiated coverage at neutral, while Mizuho downgraded the stock from buy to neutral. Driving that downgrade was the view that the company's productivity in the Bakken was in decline, and that it had an uncertain outlook. In 2017, for example, the company will spend up to $1 billion in capital, allocating 60% of that budget to the Permian Basin, which will fuel 70% production growth in the region. That said, companywide output growth will only be about 5% at the mid-point, which is a much lower rate than rivals. Further, if crude remains low, QEP Resources might need to cut spending, which would affect growth.
Now what
The slump in oil prices last month sent shivers down the backs of investors and analysts alike. That's because a further deterioration in the oil market might force weaker shale drillers to scale back their ambitious growth plans so they don't cause more harm to their already-fragile balance sheets. It's a reminder that while these companies offer higher growth potential, they're also riskier because they need steadily improving oil prices to fuel their aggressive plans. Because of that, risk-adverse investors are better off looking elsewhere for shale-fueled growth.
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