The 3 Worst Oil Stocks of 2018 (So Far)

The price of oil has been on fire this year. WTI, the U.S. oil price benchmark, ended the first half at more than $74 a barrel, which was up almost 23% for the year and its highest level since November 2014. This surge helped drive up the stock prices of most oil producers in the S&P 500. However, that rising tide hasn't lifted the entire sector as several oil stocks have lost value this year, with the following three leading the laggards.

Newfield Exploration: It just doesn't make sense

Newfield Exploration's decline this year is a bit of a head-scratcher. The company handily beat analysts' expectations in both the fourth quarter of 2017 and the first quarter of 2018 thanks to strong production results from its prime position in the STACK shale play of Oklahoma. Meanwhile, the company unveiled its three-year strategic plan to deliver 15% to 20% compound annual growth in production per debt-adjusted share, which takes into account the impact of share repurchases and debt reduction. The company noted that the oil breakeven level of that plan is $58 a barrel for 2018, meaning it's generating significant excess cash at the current price.

Newfield Exploration's underperformance this year is a continuation from 2017 when it lost 22% of its value even though crude prices were on the upswing. For unknown reasons, the market has completely overlooked this oil stock, making it an interesting rebound candidate to consider.

Concho Resources: The wrong time to pay a high price

Concho Resources made a bold bet to boost its position in the fast-growing Permian Basin by announcing a deal to buy fellow oil driller RSP Permian (NYSE: RSPP) for $9.5 billion. It's a pricey deal as it came at a 29% premium to RSP Permian's closing price and implied a $76,000 per-acre value for the company's land in Basin, well above the roughly $40,000 an acre Concho paid in previous deals. While Concho believes it can capture $2 billion in cost savings and other synergies by combining with RSP Permian, a lot must go right for that to happen.

Unfortunately, operating conditions in the Permian have taken a turn for the worse this year due to pipeline constraints. Thanks to surging production, oil pipelines out of the Basin are on pace to hit their limit later this year, which put downward pressure on regional oil prices. While Concho doesn't anticipate any production constraints because it has the infrastructure to move its oil in the region, this issue has weighed on Permian-focused oil stocks this year since they likely won't be able to grow production as fast as anticipated until new pipelines start up in the second half of next year.

Cimarex Energy: A problem coming down the pipeline

Cimarex Energy has also sold off this year due to the pipeline issues in the Permian Basin. While the company has sales agreements in place for its oil volumes in 2018 and 2019, only 70% of it is currently on pipes. Because of that, the company won't make as much money on its oil as other producers with firm contracts to move their crude to the more lucrative Gulf Coast. However, Cimarex Energy does have more flexibility than pure-play Permian producers like Concho because it also operates in the STACK shale play, so it could shift some of its operations there if needed.

That flexibility gives Cimarex the confidence that it can grow its production at a 10% annual rate over the next three years. Furthermore, at $55 a barrel, the company's plan would generate $500 million to $600 million in free cash that it could return to investors by boosting its dividend or buying back its beaten-down stock.

Time to go bargain shopping?

The sell-off in this trio of oil stocks comes even as their earnings are rising thanks to higher crude prices. Because of that disconnect, they could potentially be among the biggest outperformers in the next year since the pipeline problems are temporary and they could start using some of their excess cash to buy back stock. That's why investors might want to consider taking a closer look at these beaten-down oil stocks.

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Matthew DiLallo 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.