NEW YORK (Real Money) -- Nobody has championed the oil-and-gas renaissance in this country as I have. It's been one of the great themes of the era. The discoveries, the doubling of U.S. production in just a few years' time, the mountain of beneficiaries in the 16 states where oil is produced -- including all of the oil-service and manufacturing jobs that have been created -- have been nothing short of astounding.
But, as crude oil prices have dropped precipitously -- or, as could be easily argued for any commodity that has fallen from $100 to $62 in just a handful of months -- as it has crashed, the upside has been pretty obliterated, at least for now. The downside action is occurring everywhere in the oil patch, in places we can see and in places we can't.
Now, oil and oil-related stocks make up about 13% of the S&P 500, meaning about 13% does better with higher oil prices. That does not mean 87% do better with lower prices, though. The U.S. economy is a consumer-led one that uses more resources than we can dig out of the ground, so our society and our stocks are overall winners from lower oil prices, which are basically a tax on 317 million Americans and many industrial and service-based companies. There are far more oil burners among stocks than there are oil producers.
As oil continues to decline, those companies that are not hedged and have not locked in higher oil prices are going to keep seeing earnings-per-share benefits, and those benefits will only grow, as befits the rally the market has had. It's no secret that, if you take look at a chart of the S&P and overlay it on a chart of oil, you can see they are headed in different directions.
Nevertheless, because of the way that our stock and credit markets work, there are always going to be both obvious and hidden losers that will be bet against, and many of these are being discovered by the day.
It was easy, of course, to spot the early losers. They come in three categories: the companies that paid up late in the game for properties using $100-per-barrel oil valuations; the oil-service concerns that needed oil to continue going higher so oil-drilling budgets would remain robust; and the oil companies that spent far more than their cash flow on drilling.
In all three of these groups, stocks have just been obliterated. Have they bottomed? I think you have to do a case-by-case analysis. If you own a stock that's higher now than it where it was when oil was last at $60, and if the company has a stretched balance sheet, I think that stock is still going lower. If you own a shares in a company that has bought acreage in the last two years and must drill on the land by lease obligation, that stock's not done going down. If a company can't afford to cut back its drilling budget and isn't hedged enough, that one's not done going down either.
Again, though, you have to look at the financials of individual companies. Some saw it coming; some did not. There are probably some bargains out there already, but we don't have enough details from many of these companies to know how they would really do with oil at $60 or $50 or $40. We just know they'll go down on days when oil goes down. Maybe that's all you need to know right now.
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