Log in

Historic oil price plunge trashes sector's profit outlook

Posted on Thursday, April 9th, 2020 By Alex Veiga, AP Business Writer

LOS ANGELES (AP) — Amid a historic Wall Street crash it's been the energy sector that's suffering the worst selling, thanks to a double whammy of the coronavirus crisis and a price war among big crude producers.

The sector has lost 44% so far this year, as the price of crude recorded its worst drop in history, sinking almost 70% in the first quarter to around $20 per barrel. Global demand for oil fell 7% in the first quarter and is expected to fall 14% in the second quarter, according to IHS Markit.

“There’s been a complete collapse in demand related to sheltering in place throughout the globe,” said Phil Orlando, chief equity market strategist at Federated Hermes.

The skid accelerated last month after OPEC and Russia failed to agree on production cuts and instead launched a price war to maintain market share. Saudi Arabia threatened to pump at a record-breaking pace of more than 12 million barrels a day, but after it agreed to resume talks with Russia this week the price of oil began to recover.

The oil industry was already logging hundreds of bankruptcies before the coronavirus hit, as producers struggled with weak demand and high debt loads. Many oil companies have already cut spending and laid off workers.

Oil's steep decline has shattered energy companies’ profit forecasts. The sector is expected to see the largest decline in earnings for the January-March quarter among the 11 industry sectors in the S&P 500, with a projected drop of about 50%, according to S&P Global Markets Intelligence. For all of 2020 the sector's earnings are forecast to drop more than 86%.

Analysts say production cuts could help stabilize prices by easing oversupply concerns.

“The discussion was a 10 or 15 million barrels-a-day cut,” Orlando said. “But in order to achieve that, or anything meaningful, it’s going to have to be a coordinated cut globally, and the United States is going to have to participate.”

Even if a pact is reached, prices won't soon return to the $40-$50 a barrel range required by most U.S. producers to stay in business.

“It's going to take some time to get there since you have these two challenges, the pandemic demand shock and the global price war and production ramp-up in Saudi Arabia,” said Jeff Buchbinder, equity strategist for LPL Financial.

U.S. oil is unlikely to return to the early 2020 price of $61 a barrel until there is clarity about how soon global demand will recover from the COVID-19 lockdown — something no one has good handle on right now. Sam Stovall, chief investment strategist at CFRA, projects that oil prices will only reach $30 a barrel by the end of the year at the earliest.

Bigger U.S. oil producers like Exxon Mobil and Chevron would benefit from more stable oil prices should there be a production cut, but it may not help smaller companies that supply producers with drilling equipment.

“It is the energy and service companies that are likely to take it on the chin because at these low prices a lot of the majors will have to cut their capital expenditure budgets,” Stovall said.

Investors still looking at the sector should focus on the bigger energy producers, Stovall said. “There are some companies like Chevron and Exxon that growth investors have given up on and now they’re looked upon exclusively as income investments.”

Companies Mentioned in This Article

CompanyBeat the Market™ RankCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Chevron (CVX)3.0$90.28flat5.72%44.04Buy$113.05
Exxon Mobil (XOM)2.7$44.60flat7.80%16.70Hold$55.64

7 Stocks That Aggressive Investors Can Buy Now

There’s nothing like a steep market correction to test the risk appetite of even the most seasoned investor. With many investors seeing their 401k’s down 25%, 30% or more, it’s not surprising that many investors are taking money off the table.

And even during the most bullish market conditions, keeping some powder dry is a prudent decision.

But if you have an above-average risk appetite, then sitting on the sidelines is not your cup of tea. If you’re an investor with above-average risk tolerance, there are some opportunities to profit in this market. But you have to be looking in the right places.

At this time, the small-cap sector offers some interesting choices. Small-cap stocks are companies that have a market cap of less than $2 billion. Many of these stocks fall under the category of penny stocks, but that doesn’t make them bad. In some cases, they’re just obscure companies.

But right now, many investors will take growth wherever they can get it. And that’s why you should take a careful look at the 7 stocks we have in this presentation. The cost of entry is not high and the potential reward is worth your interest.

View the "7 Stocks That Aggressive Investors Can Buy Now".

Enter your email address below to receive a concise daily summary of analysts' upgrades, downgrades and new coverage with MarketBeat.com's FREE daily email newsletter.