Have energy prices found a bottom? Right. Sure. Yeah.
The major stock indices closed mostly lower on Monday, thanks to the plunging price of oil. Investors once cheered by a pronounced rise in oil and gas prices are now grappling with the sad truth: Energy prices are hovering once again in bear territory.
Below are two energy stocks that are particularly dangerous to investors' portfolio. They have been the beneficiaries of excessive hope this year, and they are now on the cusp of collapse as investors lose cheer and the inherent weaknesses of these stocks become clear.
The optimism that energy had finally turned a corner is dissipating, with the broader markets and energy stocks falling in tandem with oil prices. On Monday, every oil, gas and pipeline company in the S&P 500 fell, as the decline in oil prices stretched into a third week.
West Texas Intermediate, the U.S. benchmark, tumbled 3.7%, to close at $40.06 a barrel. Brent North Sea crude, the international benchmark, fell 3.1%, to close at $42.14 a barrel.
Over the past two weeks, the price of oil has fallen about 13%. Investors need to avoid the weakest stocks in energy right now, or get burned.
Here are two dogs of the energy patch.
The company's debt-equity ratio in the most recent quarter stands at 120.01, indicating that the company is primarily financing operations with borrowed money. That is disturbingly high, compared with the debt-equity ratio of 76.8 for the independent oil and gas sector.
Low interest rates and rising oil prices prompted Anadarko Petroleum to fund growth with cheap debt. Now rates are rising and prices are plummeting.
After a series of divestitures, Anadarko Petroleum has turned itself into a pure play on U.S. shale production through its holdings in the Delaware Basis, Eagle Ford and Wattenberg.
However, as oil prices resume their downward course, domestic shale producers are again under pressure, and Anadarko Petroleum isn't generating significant revenue. On July 26, Anadarko Petroleum reported a second-quarter loss of $692 million or $1.36 a share.
The stock is up more than 6% year to date, but has plunged about 7% over the past five days, with further to fall.
2. Transocean (RIG - Get Report)
With a vast global footprint, Transocean uses internal cash flows and capital markets to finance new build rig campaigns. A major dilemma for the company is that it mostly provides deep-water and harsh environment drilling services, two areas that were booming when oil prices were high but which are getting drastically cut back.
Although off its lows of the $20s reached in February, oil stubbornly remains below the $50-a-barrel threshold that energy companies need to break even. On Monday at one point, the price of oil dipped below $40.
As struggling exploration and production giants such as Chevron and ExxonMobil slash offshore budgets, the riskier and costlier offshore sources of energy are the first to succumb to budget cuts, in favor of prospects that are closer to shore and cheaper.
During the go-go days in mid-2014, when oil was trading between $80 and $110 a barrel, Transocean over-expanded and is now leveraged to unsustainable levels. Transocean has a debt-equity ratio of 56.10, considerably higher than the ratio of 26 for its industry of oil and gas drilling and exploration.
Transocean is scheduled to report second-quarter earnings on Wednesday, and it is expected to post a loss of 2 cents a share. Transocean shares have fallen more than 17% year to date and more than 6% over the past five days.
Avoid this bow wow stock. Better growth opportunities exist elsewhere.
If a blistering financial storm were to hit our shores, weak companies and their investors would be washed away. Investors need to put themselves on solid ground. And that doesn't just mean changing investment allocations or loading up on cash. Here is how investors can protect themselves and prosper.