With the inauspicious 2014 for oil coming to a close in a matter of hours, a recap reveals mostly anguish for all players in the sector, both major and minor, across the value chain. Crude prices have gone downhill for quite some time now. The commodity has sunk almost 50% from its highs seen in June this year. In fact, crude woes aren't ending with prices slipping closer to the $50 mark. The loss is being felt more acutely by the oilfield services industry, while the exploration and production industry has also felt the sting.
2014: A Year of Rise and Fall
2014 started on a promising note for companies in the oil sector. Higher realizations boosted the bottom line of these players, resulting in a distinct rise in stockholder wealth. However, the picture tarnished in the latter half of the year with the oil-dominated upstream firms turning out to be the biggest losers, with most of their profits being wiped off by the fall in oil prices.
The panic-selling by investors – precipitated by mounting oversupply and sluggish demand – spared neither the big integrated oil companies nor the more focused oil exploration and production firms. With the price of the commodity continuing to nosedive, we expect more carnage in fourth-quarter numbers and a nightmare for oil investors.
Year to date, the big oil players on an average have lost 5% of their market capitalization. Of this, the biggest loser was the British energy giant, BP plc (BP) which shed 21.1%, followed closely by its French cousin Total S.A. (TOT) which witnessed a drop of 15.9%. At home, the domestic energy powerhouses Chevron Corp. (CVX) and Exxon Mobil Corp. (XOM) have lost close to a tenth of investors’ wealth.
However, without the saving grace of downstream operations, the picture would have been much bleaker for the integrated majors. This is because the downstream players have to pay less for the commodity, which they buy from E&P companies, for producing end products like gasoline or petrol and jet fuel or aviation turbine fuel. Ultimately, the extent of the relief will depend on whether oil prices stabilize and, if so, at what level, or retreat to levels even lower.
Fed Irresponsibility or Saudi Plot?
A sharply cascading price of crude wiping away significant investor wealth brings up a host of conspiracy theories. Let’s find out who played the Grinch for the oil stocks this year.
Fed
Foremost among them is the role played by the central bank of the U.S. known as the Federal Reserve, and informally referred to as the Fed. Post 2009 debacle, the Fed infused further liquidity in the system by procuring $3.6 trillion worth of financial assets with newly issued green bucks.
This seemingly innocent move resulted in more than half a decade of a stagnant cost of capital for Wall Street. The Fed’s logic was that excess liquidity pumped into the system would result in higher stock prices. This in turn will boost consumer wealth and help increase confidence, which will ultimately help in spurring spending. Increased spending will thus lead to higher incomes and profits that will further support growth of the economy. The loose Federal policies also resulted in spiraling oil prices upward for a time.
Saudi
If this domestic twist is not acceptable as a good year-end read for our readers, we have an alternative theory concerning Saudi Arabia, the prominent member of the apex body of the international cartel of oil producers – OPEC, or the Organization of the Petroleum Exporting Countries. In the face of a sheer pullback in crude prices, Saudi opposition to cutting back production has kept the commodity’s steady southward march going.
The only respite for the commodity was some loss of production from Libya, owing to internal turbulence. However, this country is also notable for its persistent refusal to cut back production despite protests from fellow OPEC members like Nigeria, Russia and Venezuela.
The motive is attributed to a Saudi backlash in response to booming North American shale oil production. Over the past five years, domestic shale oil production, which grew by leaps and bounds, drastically reduced domestic dependence on oil imports. However, to sustain such growth substantial and steady investment is needed, which in the current environment looks to be an impossible task. On the other hand, Saudi Arabia with its foreign exchange reserves in excess of $750 billion could tide the $50 barrel storm quite easily.
Given the scenario, we have identified three stocks which have paid a bitter price irrespective of their underlying fundamentals and have suffered heavy losses at the bourses.
Transocean Ltd. (RIG)
Switzerland-based Transocean, Inc. is the world’s largest offshore drilling contractor and a leading provider of drilling management services. The Swiss major with $6.8 billion of investor wealth has lost more than 60% of its value year to date. Investor pessimism was driven by lower fleet utilization and volatile dayrates.
Ironically, the stock has delivered positive earnings surprises in the last four quarters with an average beat of 28.4%. Moreover, over the last 60 days, eight estimates for full year 2014 were raised, pushing the Zacks Consensus Estimate up by 17 cents to $4.73.
Noble Corp. (NE)
Based in London, England, Noble is a provider of diversified services for the oil and gas industry. The company performs contract drilling services with a fleet of 35 offshore drilling units (consisting of 20 semisubmersibles and drillships and 15 jackups). It also provides labor contract drilling, engineering and consulting, and project management services.
The stock fell by more than 54% year to date – feeling the deep pain of analysts’ pessimism – curtailing the Zacks Consensus Estimate for 2014 by 15 cents over the past three months. The stock has delivered positive earnings surprises in three of the last four quarters with an average beat of 20.9%.
Denbury Resources Inc. (DNR)
Plano, Texas-based Denbury Resources Inc. (DNR) is a leading E&P company engaged in the acquisition, development, operation and exploration of oil and natural gas properties in the Gulf Coast and Rocky Mountain regions of the U.S.
Oil price shocks have been pronounced for this domestic stock, which was riding on $2.8 billion and more of investor wealth. The stock lost more than half of its value year to date, which curtailed the Zacks Consensus Estimate for 2014 by 6 cents over the past three months.
Will Oil Drag on the Markets?
The question that crops up in the final hours of 2014 is whether the bourses would follow crude trends in the year to come. Our apprehension stems from the fact that lower crude prices do not automatically result in higher consumption.
On the other hand, faltering demand is a clear sign that deflation is on the horizon. Add to it, the sharp drop in crude prices over the past six months has brought a host of highly leveraged energy players near the precipice. If this phenomenon continues these companies would be unable to roll over their debts resulting in a terrible impact on the bourses in particular and the economy in general.
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