The year 2015 was clearly rough for oil. While the year is drawing to a close, a recap reveals mostly anguish for all players, both major and minor, across the sector. Crude prices are downhill for quite some time now. The commodity has sunk from around $110 per barrel just 18 months ago to around $38 now. Recently, it even touched a 7-year low of $34.29 a barrel.
In fact, crude woes aren't ending with prices slipping to the multi-year low mark. The loss is being felt more acutely by the oilfield services industry, while the exploration and production (E&P) industry has also felt the sting.
2015: A Year of Big Busts and Little Pops
Oil has been the most perplexing commodity of 2015 with big busts and occasional rises seen in a very short period of time. In particular, oil tanked to a seven-year low on Dec 7 after the Organization of the Petroleum Exporting Countries (OPEC) failed to address the growing supply glut.
The rout of 2015 turned oil-dominated upstream firms the biggest losers, with most of their profits being wiped off by the fall in the commodity’s price. 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 the carnage to continue with the fourth-quarter numbers and be a nightmare for oil investors.
Year to date, the big oil players on average have lost approximately 15% of their market capitalization. Of this, the biggest loser is the Royal Dutch Shell plc RDS.A which has shed more than 30%, followed closely by ConocoPhillips COP which witnessed a drop of 29.6%. Other major losers include Chevron Corp. CVX and BP Plc BP which have lost 17.9% and 14.2%, respectively.
However, without the saving grace of downstream operations, the picture would have been 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.
Now What?
The question that now comes first to the minds of investors ravaged by the year-long crude carnage is, pertains to the end of this rout. U.S. crude futures witnessed a fall from the skies from Jun 2014 ($107 per barrel) to the deep pit of around $34 per barrel until recently. The cascade was due to bearish comments from the International Energy Agency (IEA) that sees global oil glut as aggravating next year in the face of slowing demand growth.
Oil was also undone by The Organization of the Petroleum Exporting Countries (OPEC) – the international cartel of oil producers. Notably, OPEC’s latest monthly report showed that the oil cartel’s November production rose to a 3-year high.
Lastly, credit ratings agency Moody’s Corp. MCO slashed its 2016 Brent crude oil estimate from $53 per barrel to $43. The bearish revision comes in the wake of the outlook for prolonged oversupply as additional production from Iran would offset any slowdown in U.S. output.
Fed to Play Grinch
The role played by the Federal Reserve also comes under spotlight. Crude oil prices may again be troubled by potential multiple Fed rate hikes next year. Renewed rate hike jitters came right after a strong U.S. GDP recovery in the third quarter. Per the U.S. Department of Commerce, GDP expanded at 2.0% in the quarter versus the expected 1.9%.
In this backdrop, we have identified three stocks that have paid a bitter price irrespective of their underlying fundamentals and have suffered heavy losses at the bourses.
Plains All American Pipeline, L.P. PAA
Houston-based Plains All American Pipeline, L.P., a master limited partnership (MLP), is involved in the transportation, storage, terminalling and marketing of crude oil, natural gas, natural gas liquids and refined products in the U.S. and Canada. The partnership has operations in the Permian Basin, South Texas/Eagle Ford area, Rocky Mountain and Gulf Coast in the U.S., and Manito, South Saskatchewan, Rainbow in Canada.
The stock is down more than 52% year to date – feeling the deep pain of analysts’ pessimism – curtailing the Zacks Consensus Estimate for 2015 by 20 cents over the past three months to $1.02. The stock has delivered positive earnings surprises in only one of the last four quarters, with an average beat of -0.85%.
EV Energy Partners, L.P. EVEP
EV Energy Partners L.P., based in Houston, is a master limited partnership (MLP) created by EnerVest Management Partners, Ltd. and Encap Investments L.P. The MLP is focused on acquiring, developing, and producing from oil and gas properties primarily in the Appalachian Basin, Michigan, Mid-Continent and Permian Basin regions. Proved reserves as of year-end 2014 were 1.0 trillion cubic feet equivalents (71% gas and 84% developed).
The partnership with $129 million of investor wealth has lost more than 86% of its value year to date. Ironically, the stock has delivered positive earnings surprises in three of the last four quarters, with an average miss of -78.06%. However, over the last 90 days, two estimates for full-year 2015 have been slashed, that has lowered the Zacks Consensus Estimate by 52 cents to $2.38.
Warren Resources, Inc. WRES
Warren Resources is an independent energy company engaged in the acquisition, exploration, development and production of domestic oil and natural gas reserves. Warren’s activities are primarily focused on oil in the Wilmington field in the Los Angeles Basin in California, natural gas in the Marcellus Shale in Pennsylvania and the Washakie Basin of Wyoming.
Oil price shocks have been pronounced for this domestic stock, which has lost more than 90% of its value year to date. Over the past three months, the Zacks Consensus Estimate for 2015 has fallen by 17 cents to a loss of 92 cents. The stock delivered positive earnings surprises in two of the last four quarters, with an average beat of 18.35%.
Will Oil Weigh on the Markets?
The question that crops up in the final days of 2015 is whether the bourses would follow the crude trends in the year to come. Our apprehension stems from the fact that lower crude prices do not automatically result in higher consumption.
Moreover, 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 that has brought a host of highly leveraged energy players near the precipice. If this phenomenon continues, these companies will 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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