Personal Finance
NOG

Oil Is Soaring, Taking These Dozen Oil Stocks Up With It

CHK Debt to Assets (Quarterly) Chart

What happened

A surging stock market and a little bit of optimism had prices jumping on Dec. 26, with Brent crude futures gaining almost 8% on the day as investors take a step back from recent negativity on oil heading into 2019. The day's performance had a big impact on investor's hopes for a lot of oil stocks, with the following dozen having banner days:

Company Name Stock Price Daily Change
Baytex Energy (NYSE: BTE) 14.1%
California Resources (NYSE: CRC) 21.7%
Carrizo Oil & Gas (NASDAQ: CRZO) 13.7%
Chesapeake Energy (NYSE: CHK) 27.3%
Denbury Resources (NYSE: DNR) 23.8%
Extraction Oil & Gas (NASDAQ: XOG) 13.4%
HighPoint Resources (NYSE: HPR) 19.4%
Laredo Petroleum (NYSE: LPI) 20.1%
Noble (NYSE: NE) 13.4%
Northern Oil & Gas (NYSEMKT: NOG) 18.5%
Oasis Petroleum (NYSE: OAS) 13.5%
Whiting Petroleum (NYSE: WLL) 15.6%

Data source: Yahoo! Finance.

This sharp reversal breaks -- at least for a day -- the ugly decline in crude prices that started in early October and saw prices fall more than 35% at one point, including the biggest single-day drop in crude prices since 2014.

So what

Both stocks and oil started falling sharply in October, with recent weeks including some of the worst days for both the S&P 500 and crude futures in years. While stocks haven't fallen as sharply as oil this year, at the low point on Christmas Eve, stocks had sold off more than 17% from the all-time high from a few months ago. That marks the biggest short-term decline in stocks since the market started recovering from the global financial crisis.

At some point, all the recent selling would have eventually started to reverse. The overall health of the U.S. economy remains solid, and while there are some valid reasons to be concerned about global economic growth, particularly with less transparent parts of the world, including China, there's a good argument to be made that both oil and stocks have been a bit oversold -- hence today's super-surge in these stocks, particularly the oil producers, which benefit from higher oil prices when they sell their production.

The benefit is more indirect for service providers such as Noble, which operates offshore drilling equipment it leases to oil producers, but the general idea is that higher prices make it more economic to develop offshore reserves, which can take many years to move from exploration to commercial production.

Now what

Instead of doing a deep dive here on these companies, suffice it to say that for the most part, this is a collection of small, independent producers that want, and in some cases need, oil prices to rise higher from here. And the uncertainty around oil prices will continue to weigh on their prospects, particularly with West Texas intermediate crude, the benchmark that's closer to what most of these producers realize, still sitting nearly $10 per barrel below Brent and not much above $46 per barrel today.

I'm not saying there's no money to be made in these small, independent producers, but I am absolutely saying that their prospects -- and that of their shareholders -- is heavily weighted to what oil prices do. And as we have seen over 2018, predicting what oil prices will do in the next year or two is nigh-on impossible to do. But if you're still interested in this segment of the oil business, my suggestion is to identify the ones with the best combination of balance-sheet strength and low production costs.

Frankly, this group, as a whole, has substantial debt leverage:

CHK Debt to Assets (Quarterly) data by YCharts

That means any future shocks to the oil market -- which could still happen -- would potentially wreak havoc on their cash flows, and with already-high debt levels, many of these producers would struggle under the weight of their debt if that were to happen. One look at what their stock prices have done over the past year is all the evidence you should need:

CHK data by YCharts

Oil prices drive these oil stocks. And unless you can reliably predict oil prices (spoiler: you can't), then it's probably best to avoid this group of stocks. I've learned the hard way with Chesapeake Energy. Offshore driller Noble is interesting, with what looks like a very cheap valuation by at least one metric, but it's far from foolproof .

My advice: There are other subsectors of the oil and gas industry which have proved to be far better places to invest , particularly the midstream segment. Most retail investors would do far better to put their money there than in independent producer stocks.

10 stocks we like better than Chesapeake Energy

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Chesapeake Energy wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 14, 2018

Jason Hall owns shares of Chesapeake Energy and Noble. 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.


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

In This Story

NOG HPR NE

Other Topics

Stocks

Latest Personal Finance Videos

    #TradeTalks: The Changing E-Commerce Landscape

    e-Commerce Consultant James Thomson joins Jill Malandrino on Nasdaq #TradeTalks to discuss the changing e-commerce landscape, what consumers should prepare for as we head into shopping season and why you shouldn’t do last minute shipping.

    20 hours ago

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More