The energy sector has been a star of the recovery since it began in 2010, but as oil prices fall below $80 a barrel some players are having to reassess. Production won't be shut down, but rig counts could fall, as exploration companies cut capital budgets. And it's hitting the oil sector and the whole stock market hard.
"It's hard to hide from a capital spending cut," said David Purcell, managing partner for Tudor Pickering & Holt in Houston.
As a result, stocks throughout the energy sector are taking a hit.
The fall in oil prices has hit hardest companies that produce oil in North Dakota's Bakken, where Whiting Petroleum (WLL - Get Report) is down almost 25%, and the Eagle Ford in Texas, where Apache (APA - Get Report) and Concho Resources (CXO - Get Report) are down 15% to 20% over the past month. Even the Permian oil players are losing market value, with EOG Resources (EOG - Get Report) is down more than 11% and Pioneer Natural Resources (PXD - Get Report) down almost 13%.
Investors aren't waiting for exploration budgets to fall and are abandoning other sectors as well.
For the past month alone, shares of oil services leader Schlumberger (SLB - Get Report) are down almost 9%, those of Baker Hughes (BHI) are down almost 15% and those of Halliburton (HAL - Get Report) are down 17.5%. Those are huge losses in market capitalization, more than $10 billion for Schlumberger alone.
Or consider oil drillers.
The Baker Hughes Rig Count shows the number of onshore rigs falling in most basins, the exception being the Permian in West Texas, where drillers are still trying to prove their reserves. Rig counts in new, unproven plays such as the Barnett Shale and Ardmore-Woodford are down substantially.
This has sent stocks of companies that specialize in onshore drilling down such as Nabors Industries (NBR) down more than 20% in the past month, Patterson-UTI Energy (PTEN) down almost 20% and Helmerich & Payne (HP) down 16%.
Infrastructure companies are also seeing lower stock prices, which could slow the speed with which export facilities are built. Cheniere Energy (LNG) , which hopes to open its natural gas export terminal in 2016, has been downgraded to sell by TheStreet.
Consolidation has also begun in the pipeline space. The purchase by Targa Resource Partners (TRGP) of Atlas Pipeline Partners (APL) and Atlas Energy LP (ATLS) for $7.7 billion could become the start of a trend, with operators buying assets rather than building them to keep dividends high.
For smart investors, however, this could be an opportunity. Purcell expects a quick recovery in stock prices unless the price of West Texas Intermediate falls below $80 a barrel and stays there.
"Demand could get better. OPEC could cut production," Purcell said. "I've had more conversation on OPEC the last two weeks than the last three years," he added.
Purcell calls current trends an "air pocket" as global demand remains strong and non-OPEC supply, except for the U.S., isn't increasing.
"It's hard to find oil and gas," he said.
If that remains the case, the oil sector will recover quickly. If it changes, there could be trouble ahead for this important growth industry.Must Read: Jim Cramer on Oil Prices and Stocks: Is This a Stupid Market?
At the time of publication the author owned no shares in stocks mentioned in this story.
This article is commentary from an outside contributor, separate from TheStreet's news coverage.
TheStreet Ratings team rates WHITING PETROLEUM CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate WHITING PETROLEUM CORP (WLL) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, expanding profit margins, good cash flow from operations, largely solid financial position with reasonable debt levels by most measures and growth in earnings per share. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."
You can view the full analysis from the report here: WLL Ratings Report
TheStreet Ratings team rates APACHE CORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate APACHE CORP (APA) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its reasonable valuation levels, largely solid financial position with reasonable debt levels by most measures and expanding profit margins. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."
You can view the full analysis from the report here: APA Ratings Report