The U.S. financial market got really excited about a V-shaped recovery in early June. Since then, oil prices have risen, but oil stocks haven’t, and that’s consistent with the struggles many cyclical areas of the financial market are having.
In early June, a Friday jobs report came in and while economists were expecting millions of job losses on net, the reported number was a gain of more than 2 million. And during that time, consumer spending was beginning to make an incredibly sharp rebound over the dollars consumers spent in May and April. The 10-Year Treasury yield spiked to 0.91% (it had been sitting at below 0.7% in the weeks leading up) and the stock market surged. Crude oil continued its stead gain to $38 a barrel (remember, there was a day in late April when the price was negative).
But since June 8, the day the S&P 500 fell almost 6% as an apparent second wave of virus infections whipped across the country, the financial market has been largely risk-off. The 10-Year Treasury yield has dipped to 0.57% from 0.88%. The Vanguard S&P 500 Value etf (VOOV) - Get Report, home to both defensive and cyclical names, is down 5% and growth stocks like FANGS and some semiconductor names are up, as investors seek growth trends that can power through an economic downturn (even though not all growth trends can do that).
In this time span, oil, which one might expect would fall, has risen 8%. OPEC is trying to cut production, but it’s not doing so by a large magnitude.
But oil stocks have not had the same fortune. The Energy Select Sector SPDR etf (XLE) - Get Report is down almost 20%, which would be a bear market, since June 8. And it was in a bear market before it began rising on July 9. Large cap names like Exxon Mobil (XOM) - Get Report and Chevron (CVX) - Get Report are down 20% and 13%, respectively, since June 8. Smaller oil companies, some of which have sky-high debt burdens relative to their earnings streams, have gotten hit harder. Some have filed for bankruptcy. Occidental (OXY) - Get Report, with a market cap of $15 billion, is down 33% since June 8. Apache (APA) - Get Report, a $5 billion company, is down 23%. Chesapeake Energy (CHK) - Get Report, a sizable company to start 2020, is now worth $83 million and has filed for bankruptcy. It filed on June 30, after oil prices had begun rebounding.
For the larger players, they are actually posting net losses as the price of oil is still 34% below its 2020 high of $63 a barrel. Exxon’s revenue for the first quarter fell 12% to $56 billion and the company posted a net loss of $610 million on a GAAP basis, which does signify it may be close to profitability if prices can keep moving up. Occidental, though, posted a net loss of $2.2 billion in its quarter reported in May.
The point here is that, even with oil prices moving higher for now, oil companies are still posting losses because they cannot be profitable at these price levels. So the question is not whether the price can keep rising, but rather whether it can reach a key level. It may be somewhat near that key level because analysts, according to FactSet, are looking for sequential revenue improvements in 2020 and profits in the fourth quarter, at least for the big guns. But oil stocks can’t trudge higher if earnings are not only shrinking, but coming in at negative dollar figures. And for the smaller guys, it’s only a matter of time before the debt burden becomes to high. Occidental’s net debt of $35 billion represents 70% of its total enterprise value.
The next potential headwind: lockdowns all over again. The good news: the smaller oil stocks are incredibly cheap and some of them could conceivably be rescued.
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