Why Oil and Gas Stocks Are Slumping Today

What happened

Shares of oil producers Laredo Petroleum (NYSE: LPI) and SM Energy (NYSE: SM) , as well as units of Golar LNG Partners LP (NASDAQ: GMLP) , an MLP  that owns liquified natural gas carriers and floating storage and regasification units, all declined by double digits by Friday afternoon. Lower oil prices weighed on the first two, while an analyst downgrade was the culprit in the latter.

So what

Golar LNG Partners took the biggest tumble, falling more than 11% by 2:45 p.m. EDT on Friday, which followed yesterday's double-digit sell-off . Driving today's decline at Golar LNG Partners was a two-notch downgrade by BofA Merrill Lynch , which cut the MLP from a buy all the way down to underperform. It also slashed its price target from $16 to $24.

The bank downgraded Golar LNG Partners amid concerns about the company's cash flow and the sustainability of its distribution. That's after distributable cash flow slumped to just $13.3 million last quarter, which was only enough to cover Golar LNG Partners' distribution by 0.32 times -- meaning it paid out roughly three times more than what came in, a level that isn't sustainable for much longer.

A natural gas well with a pipeline at sunset.

Image source: Getty Images.

Meanwhile, crude oil prices skidded lower today, falling about 2% to their lowest level since April on renewed concerns that OPEC might boost its oil output . Overall, the U.S. oil benchmark, WTI, fell 3.1% for the week, closing at $65.81 per barrel and is now down nearly 10% from its high for the year.

The drop in the price of crude sent most oil stocks down today, though it had the greatest impact on SM Energy and Laredo Petroleum, which declined about 10% by mid-afternoon. That's because investors are growing increasingly concerned that crude prices could have further downside ahead if OPEC moves forward with a plan to boost production. If that happens and crude keeps falling, it likely would have an outsized impact on the profitability and cash flow of smaller producers like SM Energy and Laredo Petroleum. It's for this reason that these companies are taking it on the chin today.

Now what

After a relentless rally for several months, crude prices have quickly cooled off on concerns that OPEC is about to boost output. If that happens, smaller and financially weaker companies like Golar LNG Partners, Laredo Petroleum, and SM Energy could have even further to fall. That's why investors are better off avoiding those stocks and considering larger and stronger oil stocks like this trio instead .

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance , Stocks
Referenced Symbols: GMLP , LPI , SM

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